Student Loans-Interest Rates: Now and Soon

March 22, 2009 by  
Filed under Student Loans

Not too long ago, Stafford student loans and other student loan programs have changed their interest rates from fixed rates to variable rates. But in July 1, 2006, they went back to their fixed rates yet again.

However, this can change yet again. The government can always undo what it has already done. Besides, lenders have quite some flexibility, so even official rates can subtly change in various ways. For instance, a lot of lenders charge an origination fee of 3% from the government, while the default insurance rate is 1%. Others may be willing to take in the cost to get to our business. As a rule, though, any fee of 3% is equal to a 1% interest rate.

Although most interest changes are modest (for example, PLUS student loans have increased from 6.1% to 8.5%), even a simple and low amount of $16,000 that is borrowed will add around $400 in interest charges in only one year with a 2.4% rate difference.

If you would like to see precise amounts per month, you can go through sample scenarios with using a student loan calculator, one of which you can find at: http://www.bankrate.com/brm/mortgage-calculator.asp

There are never any guarantees. Rates can keep changing because they are quite like variable rate home loans. Predicting interest rates of the near future or the distant future is a challenging task, even for the experts of finance. If it were not so, the bond market would be pretty boring. The most any student or parent can do is see what the experts have to say.

An easy way to keep up with the predictions of experts is by taking a look at different interest-bearing financial instruments, like long-term corporate bonds or T-bills. By taking a good look at these numbers, possible borrowers can easily guess which way the interest rates are going. This information can be obtained from practically any finance website; try Yahoo Finance.

The Treasury bill, for example, shows us two things: what debt the government is offering to sell debt over the next few decades, and what those who want to buy those debts are ready to pay. Since the rate fluctuates, student loan rates may also fluctuate.

The same holds true for particular corporate bonds, like Ford Motor Co. They have been suffering financially for a couple of years now and this can be seen through their bond rates and ratings. Back in the day, they had quality ratings, but now they are near the junk bond level.

As these rates rise, it just gets harder for borrowers to repay student loans. Not only do students and parents need to shell out more money, but it also gets harder to qualify for student loans because of this. Stafford student loans and other student loan programs are based on needs, so this may not be a factor there, but the interest rates of one student program usually influences other student loan programs that are based on credit history.

The best strategy for now would be to get a private student loan with fixed rates. The ideal student loans cost only 1%, which is a great deal; however, borrowers will have to have good credit history in order to avail of it.

There is no perfect solution to pay for education nowadays; but, like with other costs, looking around for available options is a good way to start.

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