Understand true cost of college
College plans remain suspended for many thousands who are wondering just what the next academic year will look like. Schools are in the process of deciding if and how they can reopen campuses safely. And students are deciding whether to take the risk of attending — even after negotiating some significant tuition breaks.
And into the middle of that falls the news that interest rates on student loans will be sharply lower for the upcoming year. Since student loan rates are tied to 10-year Treasury borrowing rates, and everyone knows rates are near zero, the decline is not surprising.
Credible.com, a website that lets families compare student loan rates, estimates that the 2020-2021 rate decline will result in cumulatively saving borrowers more than $9 billion over 10 years, as they repay their loans. Here are the new rates:
Undergraduates: 2.75% (down from the 4.53%)
Graduate students: 4.3% (down from the old rate of 6.08%)
Grad and parent PLUS loans: 5.3% (down from 7.08%)
Before you start cheering the good news, there are two key points to keep in mind. First, the 2.75% rate is still far more expensive than the current 0.70% rate that the U.S. Treasury pays to borrow money for 10 years. How fair is that — especially since the Treasury stands behind the loans?
Second, it’s important to remember that these low rates apply for the life of this student loan. Next year’s rates could be higher, but hardly could go lower. Fixed lifetime rates have a dramatic cost.
Today, with more than $1.6 trillion of outstanding student loans, everyone — all 45 million people with loans outstanding — is paying much higher rates than today’s new lower rates.
The average rate on outstanding student loans is over 6%. Anyone still paying on a student loan from 20 years ago likely has an interest rate of 8%. And older outstanding student loans carry rates as high as 10%. It’s no wonder families have been swamped by student loan repayment issues.
Parent PLUS Loans: The worst deal
Even worse, parents who took out Federal PLUS loans to help their kids through college paid a rate of 8% (plus origination fees) on loans taken out between 2006 and 2013. Even last year, new Plus loans cost more than 7% — making them the worst borrowing alternative on the planet.
These parents were trying to give their children a better life through education. Instead, they mortgaged their own future retirement. Americans over age 60 owe more than $86 billion in student loans, according to a Wall Street Journal study. In one recent year, the federal government garnished Social Security benefits, tax refunds or other payment of more than 40,000 people 65 or older.
Private student loans
About 10% of student loan debt outstanding is in the form of private student loans — based on the credit rating of the borrower.
In fact, that means most of those loans are cosigned by parents. Since they already have other debt, the rate is typically higher than even these expensive federal student loans. In fact, according to StudentLoanHero.com, some private student loans carried an interest rate of over 14% a year ago.
It’s not easy to get out from under the burden of student loan debt. You can refinance federal student loans if you have good credit, using websites like SoFi.com and Credible.com. But refinancing federal loans means you give up some protections, such as forbearance and deferrals. Parents can pay off PLUS loans with a lower rate mortgage — but mortgage interest on the portion used to repay student loans is not tax-deductible. And the Public Service Loan Forgiveness program has been a sham, with only 845 loans forgiven as of 9 months ago despite tens of thousands of applications.
That’s why it’s so important to calculate the true cost of college before you commit to the school of your dreams. Students have never been in a better position to demand lower tuition from colleges. Or in a better position to consider whether an expensive school is worth the long-run costs. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books. Terry responds to questions on her blog at TerrySavage.com.