Empowering Your Education: A comprehensive look at student loans.

You don’t have to be the smartest kid in class to know that getting a college degree is expensive. Today, more than half of all undergraduate students (or their families) borrow money to pay for books, tuition, college fees, and living expenses. According to U.S. News & World Report (USN), data submitted from over 1,000 colleges and universities shows the average member of the class of 2022 borrowed $29,417 to complete their undergraduate studies, about an 8% increase from the average amount borrowed by the class of 2012. According to the Education Data initiative, in 2023 the average public university student will borrow $32,637 to obtain a bachelor’s degree.

The average can be further impacted by attending a private school, which usually costs more than public schools, largely because of differences in how they are funded. Like colleges, there are two types of student loans: federal student loans, which are funded by the government and issued by the U.S. Department of Education; and private loans, which are primarily funded by banks and other types of lenders. Generally, federal student loans have lower interest rates because of government subsidies, including covering the interest until after the student graduates. There are exceptions — private colleges can cost less than public universities, and private loans can have lower interest rates than federal loans, but securing one requires outstanding credit worthiness. In any case, it’s always a good idea to shop for the best rate.

It’s worth noting that the average numbers highlighted above are misleading because more than 40% of college students graduate with no debt, which skews the average significantly.

Federal loans account for about 92% of all student debt. The Education Data Initiative reports the average federal loan debt balance is $37,718, and when private loans are included, the average may be as high as $40,499. Given the current interest rate environment, it is no surprise student loan interest rates are a hot topic, but other factors are also driving interest in the subject.

First, after a three-year pause on payments with no accruing interest (brought on by the Covid-19 pandemic), people with student loan debt had to resume making payments in October. Suddenly, a huge amount of household income that was being spent in the U.S. economy for nearly three years is now being redirected into paying off America’s $1.77 trillion in student loan debt– an amount equal to the federal government’s entire budget for 2022. That’s a significant impact on the national economy and household finances.

Second, all federal student loans feature fixed interest rates, so these borrowers will see no change in the amount of their payments, but many private loans have variable rates, or shorter terms, and these borrowers are now seeing significant increases in their payment amounts.

Finally, interest rates for new federal student loans are at their highest level in over a decade, making borrowing for college more expensive than ever.

Let’s look at how student loan interest rates are determined.

Federal student loan interest rates are set by the U.S. Department of Education and revised annually. The rates are often based on the yield of the 10-year Treasury note and are fixed for the life of the loan. There are three types of federal loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and PLUS Loans. Direct Loans are available for undergraduate students and have lower rates than PLUS loans, which are available for graduate students and parents. The interest rate for Direct Loans has historically been 1.5 to 3 percent lower than the rate offered for PLUS loans.

Direct Subsidized Loans are based on financial need. The amount that a student may borrow is determined by the school, not the Department of Education, and cannot exceed the student’s financial need. The Department of Education pays the interest on Subsidized Loans while the student is in school at least half-time, for the first six months after leaving school (aka grace periods), and during periods of deferment.

There is financial need requirement for Direct Unsubsidized Loans. The amount available to borrow is again determined by the school and is based on the cost of attending and other financial aid available to the student. The borrower pays the interest on Unsubsidized Loans from the start and there no grace periods or deferments.

Students can take out subsidized and unsubsidized federal loans for the same school year, with limits and ratios set by their individual circumstances. The interest is the same for both types and remains fixed for the life of the loan. The Federal Student Aid website (studentaid.gov) offers a wealth of information on these loans, including repayment options.

Experts recommend maxing out federal student loan (and grant) opportunities before turning to private student loans. It also worth researching opportunities for free education loans – free as in zero interest and no fees – they do exist.

As the term implies, private loans are not associated with any school or the Department of Education. Sallie Mae, which began in the 1970s as a U.S. government-sponsored entity that serviced federal loans, was spun off during the 1990s and completely transitioned to a publicly traded corporation in 2004, specializes in private student loans. Currently, advertised private loan rates range from Sallie Mae’s 4.5% fixed (6.37% variable) to an upper range of 16.99%. Interest rates and terms for private loans vary widely and are based on creditworthiness, loan duration.

Why do some private loans have lower interest rates than those offered through the Department of Education? The answer is limits, terms, and credit scores. For many borrowers the interest rates on federal student loans will be lower than what they can obtain through private lenders, which is why it is important to start with federal loans and borrow the remainder from private sources.

For undergraduate students, the current aggregate limit for federal student loans is $31,000 for dependent students and $57,500 for independent students. The maximum amount of subsidized loans allowed for undergraduates of either status is $23,000. Repayment options vary from 10 to 25 years. Remember, federal student loans are always at a fixed rate for the length of the loan. Certain federal student loans may also be forgiven, cancelled, or discharged, which is not possible for private loans.

When considering student loans, it’s essential to understand the interest rates, as they directly impact the overall cost of your education. Borrowers should also be aware of the loan’s terms, repayment options, and any available discounts or incentives. Again, experts recommend exploring federal student loans first, as they often have more favorable terms and borrower protections compared to private loans. However, in some cases, private loans may be necessary to bridge the gap in education funding.

7 smart tips to get the lowest rates on private student loans:

1. Research your options
   Rates vary widely – investing time and shopping around can pay off. Don’t apply for any loan before narrowing the field to one or two of the best options.
2. Build your credit score beforehand
   The higher your score, the lower your rate. Other factors count, including income and existing debts, but your credit score will be a huge factor in getting the lowest rates.
3. Have a co-signer
   A co-signer with good credit and steady income will make it easier to get a lower rate. Many loans have the option to release the co-signer of responsibility after a certain period.
4. Agree to use autopay
   This can save you .25% on the rate, which adds up over time. It also gives you one less thing to take care of while you’re busy getting an education or getting started in your career after graduation.
5. Ask about discounts
   Many lenders offer other discounts in addition to autopay: loyalty (borrowing from institution with which you have an existing relationship), interest-only payments, promotion periods, and linking autopay to an account with that institution.
6. Fixed or variable?
   Depending on how quickly you plan on paying off your student loans, a variable rate might be lower, especially if you have good credit.
7. Go short term
   Generally, the shorter the loan term, the lower the rate, but before you decide, research what it will cost if you need to refinance your loan later. One downside – shorter terms will also mean higher payments, but you’ll pay down the principal faster.