The Real Scoop on Student Loan Interest

Contributed by Kelly Campbell, CEO, CFP®, ChFC®, CMFC®, AIF®
Campbell Wealth Management
Alexandria, Va

So you have Student Loans and are you getting a little concerned about
what the government has done to interest rates.

Kelly Campbell, CEO,
Campbell Wealth Management

Well for those of you with existing loans, don’t worry. The new rates will not affect you. For those of you who plan to take out a loan for the 2014 fall semester and later, you’ll get a break as your loan interest rate just got cut in half.

President Obama signed into law legislation that locked the Federal Student Loan interest rate which was set to increase (as of July 1^st) from 3.4% to 6.8%.) The new law has tied the rate to the ten year treasury. Now students know what their long term loan rate will be even after they graduate. This makes it easier to plan for post graduate expenses.

Below is a table that shows whose loan is subject to what rate.

Type of Loan	Interest Rates
Direct Subsidized/Unsubsidized Loans (undergrads)	Fixed at 3.86%
Direct Unsubsidized Loans (graduate/professional students)	Fixed at 5.41%
Direct PLUS Loans (parents and graduate/professional students)	Fixed at 6.41%

 Ok, Ok but what does that mean to you? That is the real question.

First and foremost, for those of you still in school, it does not mean much because as long as you are taking classes, your payments are being deferred (except for PLUS Loans). But once you graduate, that specified rate will kick in and you will begin making payments based on that rate. While this percentage is likely to stay somewhat constant over the next two years, it will almost definitely rise after that. That rise could be substantial. The law also sets maximums on the loan rates for undergrad, graduate and Plus loan programs at 8.25%, 9.5% and 10.5% respectively.

Second, let’s put it in dollar terms. The table below shows the average payment for a student based on a $10,000 and $20,000 debt level after graduation.

Subsidized debt after grace period	Payment based on old rate of 6.8%	Payment based on new rate of 3.4%	Payment based on a max increase to 9.5% (grads)
$10,000	$115.08/mo	$98.42/mo	$129.40/mo
$20,000	$230.16/mo	$196.84/mo	$258.80/mo

So the thing to be thinking about is how you will be able to repay your loans when your payment period begins. Also for those of you who will be taking on more debt over the next few years, as the ten year treasury increases, so will your payment amount. Good luck and be sure to get a job quickly after you graduate.

 Kelly Campbell