GOLDEN VALLEY, Minn. - High debt levels, and a lack of jobs for recent grads are a dangerous mix.
The federal student loan default rate is at its highest level in 14 years, right now it exceeds credit card, mortgage and other consumer debt.
Financial advisor, Dan Ament with Morgan-Stanley in Wayzata came to KARE 11 Sunrise to talk about your options when borrowing to pay for college.
Stafford Loans are low-interest loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. Eligible students borrow directly from the U.S. Department of Education Stafford Loans are available for undergraduate and graduate students and come from Direct Stafford Loans made by the U.S. Department of Education. You will repay a Federal Direct Stafford Loan to the U.S. Department of Education. These include two types of loans:
Subsidized - A subsidized loan is awarded on the basis of financial need, as determined by the information you submit on the Free Application for Federal Student Aid (FAFSA). If you are eligible for a subsidized Stafford loan you will not be charged interest while you are in school on an at least half-time basis, during a grace period of up to six months after you are no longer enrolled on at least a "half-time" basis, or during certain defined deferment periods. The Federal government pays (subsidizes) the interest during these periods.
Unsubsidized - An unsubsidized loan is not awarded on the basis of need. But you still must apply using the FAFSA. For unsubsidized loans, you will be charged interest from the time the loan is disbursed until it is paid off in full. However, you can choose to defer payment of interest while you are in school and during any grace or deferment period. However, if you allow interest to accrue (accumulate) during these periods, it will be capitalized. This means that interest will be added to the principal amount of your loan, and additional interest will be based on that higher amount.
What caused the issue at hand? Under current law, Congress sets the rates for student loans. Legislation enacted in 2007 set the interest rate on the new subsidized Stafford loans at 3.4% for subsidized loans. That rate was to expire last year, however Congress extended it through June 30, 2013. Without Congressional action, the interest rate on those loans will double to 6.8% on July 1st, affecting more than 7 million students.
U.S. House Bill H.R. 1911 - The House legislation passed last week would peg new student loan interest rates to yields on the 10-year Treasury note (currently around 2.1%) plus 2.5%, or about 4.6% beginning July 1st. This would mean rates would fluctuate based on the 10-year Treasury rate. It would also set a cap on those rates at 8.5% and Plus loans would have a cap of 10.5%.
U.S. Senate Bill S. 953 - Proposes extending current rates for two years however the means of financing the cost of doing so could be a hurdle - citing curbing tax breaks for retirement accounts, the oil industry and foreign companies to pay for the extension.
Bottom line? Borrowing funds to pay for college is necessary for a large number of students pursuing higher education. Given the rate environment and risk of higher costs in the future for the Stafford loans cited above as well as other sources of student debt, it is critical that the students and parents examine the likely borrowing necessary related to any school being considered. Moreover, the potential for increasing interest rates needs to be considered when reviewing repayment requirements.
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