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6.8 Used To Be A Good Student Loan Interest Rate

what is a good student loan interest rate

As you know by now, the interest rates for Federal Student Loans doubled on Monday from 3.4 percent to 6.8 percent. While it may be very easy (and maybe even a little fun) to blame one political side or the other, students and parents should take a deep breath today and try to put all of this into perspective. The increased rate will only add about $3,000 to the life of the average four year loan over the repayment period. Also, it was only just a few years ago that students, parents and legislators were fighting FOR a 6.8 percent loan.

History Of Student Loan Interest Rates

In 2002, Congress lowered the interest rate on Federal Student Loans to 6.8 percent. With a much healthier economy at that time, this was considered a reasonable rate for students and their co-signers (usually parents) to pay for their continuing education. It was tied to the 91 day Treasury bill, so while the rate could drop below 6.8 in the future, it could go up; the top rate was capped at 8.25 percent. This bill passed through the House with a large, bipartisan support and later passed the Senate with unanimous consent; a very rare occurrence in Washington D.C.

It didn’t last for very long however. Five years later with a new, now Democratic Party controlled Congress in session; the interest rates for Stafford Loans were cut over the next three years until they were 3.4 percent. This was supposed to be only for the 2011-2012 school year, but given the state of the economy, not to mention that it was an Election Year, an extension was quickly passed. Members of both parties in 2007 and again last year were quick to accuse each other of partisanship and dodging a permanent fix to the “problem” of a 6.8 percent interest rate.

Here is what also makes 6.8 percent so high to people who follow the ups and downs of the situation: If the old formula (prior to 2002) were followed, the current Stafford Loan rate should be in the range of only 2.3 to 2.4 percent; that is the Short-Term Treasury Rate + 2.3 percent. This is a full four points below what the rate is now and even less than some of the proposed legislation to fix the “problem”.

Sound The Alarms!

Despite calls of alarm from organizations such as the U.S. PIRG (Public Interest Research Group) and the U.S. Student Association. this may not be the time to panic. Why? Because in 2001, these same groups were pushing for a 6.8 percent interest rate. Back then, it was hailed as a rate that could help middle and lower income families get their kids into college and on the road to the American Dream. On Monday, the PIRG issued a statement that “Congress is pushing student borrowers to their limit”. The U.S. Student Association points to the now $1 Trillion in student loan debt; “We have an affordability crisis and a student debt crisis that has to be addressed.”

There is some truth in both statements. The value of the U.S. Dollar is lower than it was twelve years ago. Families do have to stretch their budgets farther, but an additional $9 to $15 a month in interest payments; which won’t even start to be repaid until four years from now is not going to crush most people as long as they can find reasonable employment. While the economy is still very slow, it is growing; students looking for work in 2017 will presumably face a healthier job market than recent graduates now.

Even so, Stafford Loans and the other Federal Student Loan programs are still the best interest rates for student borrowers for this year and for a long time to come. Depending on the bank, a private four year loan rate can be four points or more higher than a federal loan. The terms under a private loan are rarely as beneficial to students and their parents as with a federal loan.

Students and parents should look at their goals in the same manner as they would if loan rates had not changed three days ago. Both the House and Senate were working on bipartisan plans to not just extend the current loan interest rate, but to put in place a better system to adjust future rates and keep the Federal Student Loan Program available to students and families who need it. Check in here at Student Debt Relief for the latest information as you prepare for the upcoming school year.

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