Beginning this July 1st, many college students and graduates will see their loan payments shrink. Why? Because there will likely be decreases in the variable interest rates; as a result, educational borrowing costs will come in at 38-year lows.
You might keep this in mind when you are doing any financial planning for clients who have college-age offspring.
This fact of sinking borrowing costs is considered a bright spot in an otherwise stagnant economic climate where families face college tuition-fee hikes that are well above inflation. In a state like Florida, for example, tuition at state universities there rose five percent for the 2002 academic year.
Consequently, many colleges now report that applications for financial aid have skyrocketed, not to mention the number of applicants that even qualify for some sort of aid. According to Carole Pfeilsticker, director of financial aid at Florida Atlantic University in Boca Raton, Fla., "This has become a boon for students for these are very popular loan programs."
For one, the interest rate on Stafford loans is expected to fall from 4.06 to 3.42 percent--a pretty good drop, and the lowest since the program began in 1965. These loans are available to all students, with the government paying the interest for financially needy students while they're in school.
In addition, the rate for another federal borrowing plan, the Parent Loan for Undergraduate Students, will likely come down from 4.86 to 4.22 percent.
Also, those who are able to consolidate their loans can lock in a rate as low as 3.5 percent, down from 4.13 percent, according to Sallie Mae, the largest holder of student loans. Therefore, a student who consolidates $25,000 in recent debt could save almost $2,000 over 20 years, or $8 a month--the price of a pizza. ''Even saving a few bucks for a pizza is important to college students,'' says Dart Humeston, the assistant dean of enrollment services at Barry University in Miami, Fla.
One caveat. These lower rates, while likely, are still not guaranteed. The final interest rates on federal student loans will be determined at the end of May based on short-term Treasury bill rates. Therefore, you have to be a little careful with how you see this for it's basically a variable rate.
Of course, there is talk floating about that five years from now, it could go up to a maximum of 8.25 percent, depending on what Treasury bills do. Something to ponder.
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