For the first time in three years, rising college costs will reflect not only the increase in tuition and fees but also higher interest rates on student loans. Beginning this academic year, rates on federal loans for undergraduates increase to 4.45% from 3.76% and for graduate students to 6% from 5.31%. In addition, rates on Grad Plus and Parent Plus loans jump to 7%, from 6.31%.
The new federal loan rates for the 2017-2018 academic year cover borrowings from July 1, 2017 to June 30, 2018; they are fixed and will not change during the term of the loan. The rates are based on a set spread to the 10-year Treasury auction results in May, ranging from 2.05% for undergraduate loans to 4.6% for Plus loans.
While rates are rising, fees and loan limits on federal student loans are not. The fee for undergraduate loans is 1.068% for subsidized loans (loans that don’t accrue interest while the student is in school and for six months after graduation) and 1.069% for unsubsidized loans. For Parent Plus and Grad Plus loans the fee is 4.27%.
Also unchanged for the coming school year are loan limits. For undergraduate students the limits are $5,500 for the first year, $6,500 for the second and $7,500 for the third and fourth years. The cumulative limit remains unchanged, at $31,000.
For graduate students the limit is $20,500 per year ($40,500 for medical school) with a cumulative limit, including undergraduate loans, of $138,500. The borrowing limit on Parent Plus and Grad Plus Loans remains the annual cost of the school minus any financial aid, and there is no cumulative limit.
Only Pell grants, given to students in need (whose expected family contribution is $5,328 or lower] saw an increase in loan limits, albeit a very small one, from $5,815 to $5,920.
Private loans are another option for students and their families to help pay for undergraduate and graduate programs, but even Sallie Mae, a private lender, recommends in a recent press release “a 1-2-3 approach to paying for college: first, maximize money that does not need to be repaid, such as scholarships and grants; second, explore federal student loans; and, third, consider a responsible private student loan.”
Some private loans, like Sallie Mae’s, are available with fixed and variable rates, unlike federal loans whose rates are fixed. Fixed rates on private loans tend to be higher than those on federal loans, but there are exceptions.
Sallie Mae, for example, is currently offering fixed-rate graduate student loans for more than 25 health professions and business school (for an MBA) starting at 5.74%, which is lower than the federal graduate student loan rate of 6%. But its fixed rates can range up to 8.56%. Its variable-rate loans range from 3.12% to 8.09% and could rise as interest rates do.
Beyond comparing interest rates, students and families should consider other differences between private and public loans. Most important, interest accrues on private loans while the student is in school, which is not the case for subsidized federal student loans (it is for unsubsidized federal loans); some repayment options, such as income-based repayment plans, are not available from private loans; and default declarations are less borrower-friendly with private loans: usually after 120 days of nonpayment versus 270 for federal loans.
--- Related on ThinkAdvisor: