Bridging the Dollar Gap
Rising loan rates make it essential for families to act quickly and be resourceful
To help pay for her college education, Thanh Phuong Nguyen, a sophomore at Washington University in St. Louis, delivers sobering news about paying for college to applicants. On behalf of the Scholarship Foundation of St. Louis, she visits high schools to warn teenagers against expecting financial aid to cover all of their college costs. (In fact, only about half of students get any kind of grant or scholarship, and those average just $4,000 a year.) Most students shouldn't expect parents to cover the costs, either. (The average sticker price of about $67,000 for four years at a public university would more than wipe out the savings accounts of at least 80 percent of Americans.) And, Nguyen says, it is extremely difficult to work enough to pay for college and still succeed in class.
That means they'll have to do what Nguyen is doing--take out thousands of dollars of loans to fill the gap left after scholarships, savings, and earnings. "Most kids don't want to borrow. It is really hard to show them the reality," says the double major in psychology and finance.
The pinch. Next semester, Nguyen's financial-reality spiel will be even harder. Even as tuition is rising, forcing students to borrow more, Congress has doubled the financial whammy by raising interest rates on education loans. Students who take out a Stafford loan this September will have to pay a fixed 6.8 percent. That's up 1.5 percentage points from the variable rate charged this spring. And parents who borrow from the Parent Loan for Undergraduate Students (PLUS) program will most likely have to pay at least 8 percent, up about 2 percentage points. The combination of bigger debt loads and higher interest rates could easily raise students' repayment costs, which now average about $2,500 a year, by more than $400 annually.
But Nguyen does hold out hope. She and thousands of others have figured out clever ways to reduce or even eliminate their monthly loan payments. And no matter what stage your education is at--even if you graduated years ago--you might still be able to cut your repayment costs if you act soon.
Any student, graduate, or parent who has at least one federally insured education loan can prevent his or her payments from getting any worse by locking in the current low rates before they jump on July 1. Even those with just one loan can "consolidate" the debt, as the refinancing process is known. By consolidating loans, borrowers lock in a fixed rate of the average of whatever they are currently paying. Students who apply before July 1 can lock in rates of no more than 4.75 percent. Those who graduated more than six months ago can cap their rates at 5.375 percent. And parents with at least one unconsolidated loan can set a ceiling of 6.125 percent on their PLUS loans, saving themselves perhaps $1,000 in payments over the life of a $10,000 loan.
Shop around. Those who have borrowed from only one source must consolidate with their current lender. Anyone who has taken a federal educational loan from more than one lender can shop around for the best deal. Many lenders, for example, will knock a quarter point off the interest rate for those who agree to pay by automatic debit. And several offer other incentives. The College Loan Corp., for example, will subtract 2 percent from your balance after nine on-time payments. To seek the best consolidation deal, check with your financial aid office and visit websites like that of the Education Finance Council, a trade group that is posting many lenders' offers.
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