According to Act’s guideline, the interest on federal student loans changes every first day of July of each year. This happens between July 1st and June 30th of the following year. The formula used for calculating this interest is based on a 10-year treasury rate.
These Directly subsidized and of course unsubsidized Stafford loans increased from 3.76% to 4.45% in 2017 for undergraduates. On the other hand, graduate direct subsidized Stafford loans grew from 5.31% to 6% last year.
The same applied to Direct PLUS loans which grew to 7% from the initial 6.31%. Most students are always not at ease with these increases.
When you understand the whole idea of interest rates on federal loans, it will lead you to a part of financial accomplishment. It is unfortunate that most students took loans without adequately researching them. Nobody wants to be indebted all their life.
It does not matter how small the amount is. So, read on!
The Congress is responsible for determining these rates on Direct Loans. The U.S. Department of Education furnishes the Congress with the rates and the legislation ties them to the financial market.
It is not the duty of the loan servicer to determine your interest rates as believed by most students.
Does this increase actually affect you?
For instance, this means that $5,500 loan that is subsidized by an undergraduate would amount to $6,607 as the total if the payment plan is the standard 10-year term. Because of the increase in the interest this year, it will rise to $6,824.
The difference is $217 which amounts to $1.80 per month on a 10-year standard plan.
The figures will increase slightly if they are unsubsidized loans. The interest starts accruing from the disbursal date. A Stafford Loan of $5,500 that is unsubsidized will accumulate $201 as interest for one year if the rate is 3.76%.
If the interest rate is 4.45%, the total interest will increase by $245. The amount paid each month will increase from $1.80 to $2.18. These margins may not matter to students whose debts are marginal.
But when you have obtained several loans, an increase in interest rates can be so frustrating and hard to accept no matter how much it is.
How to Manage the Cost of a Loan
It seems very difficult managing higher interest loans. The best choice is to start offsetting your interest as fast as possible. If you obtained an unsubsidized loan, it simply means that the interest will have to be repaid while you’re in college.
This seems impossible to most students. However, let’s take a look at the math involved. If you took an unsubsidized loan of $5,500 and it accrues up to $245 interest, the best option will be to pay it off before it’s supplemented to the total amount you owe.
If nothing is done to offset the interest, you may start paying interest on interest. So, the best way is to pay the sum of $20 every month to offset the interest from the previous year.
Meanwhile, if your loan is subsidized, it is better to apply the same measure so that you can repay your loans on time.
Have you heard of origination fees?
Interest rates on student loans are not the only thing that gets increased annually. Origination fees on federal loans also increase yearly. However, the time of the increase is quite different.
For origination fees, the increase takes effect from October to the 30th of September of every year. Most loan servicers usually take out this fee before they disburse the loan money.
This means that the loan servicer receives the origination fee before you are given the proceeds of the loan.
The origination fee for this year will reduce federal student loans. However, the reduction is minimal and may not make any difference.
The origination fee will drop just by a fraction percentage. For instance, the origination fee for a Direct Stafford Loan for 2017 to 2018 academic year will be 1.066%. Last year, the origination fee was 1.069%.
This reduction will also affect Direct Plus Loans. It will be reduced from 4.276% to 4.264% this year.
How interest rate is calculated.
The total sum that accumulates as interest on a student loan is determined by a daily interest formula. All you need to do is simply multiply the balance by the number of days since the last payment by the interest factor.
Is There Any Other Way Out?
Finance experts are currently working out modalities on how to use home equity to repay student loans. When this is done, the borrower will get a reduced mortgage rate. Something similar is happening in San Francisco where a loan servicer SoFi permits homeowners with a loan-to-value of 80% to do that with their home equity. The program is called Student Loan Payoff Refi.
For example, let’s say you owe $40,000 on a student loan and the interest rate is 6.5%, and you have a house valued at $300,000 with a $200,000 mortgage at 3.9%.
What the program will do is allow you to cash out so you can repay your student loans. This will also help reduce the monthly interest.
According to Michael Tannenbaum, who is the revenue officer at SoFi, homeowners that obtained student loans can use it to offset a higher rate on their student loans.
Parents that took loans for their wards’ schooling are most likely to benefit from this program.
The good news is that loan servicers are currently thinking of new incentives to encourage more students from taking loans. The financial market is saturated with new lenders. This will provide consumers with more opportunities. Dash, a CEO of one the loan service companies, said he expects big banks to get into the student loan market.
The fastest way to pay off student loans is self-discipline and hard work. Most loan servicers are in business to make a profit, so let your monthly remittal be above the minimum. This will enable you to pay off the loans faster.