On July 1, 2016 those people getting accepted to college and those planning on applying for and taking out a college loan could breathe a small sigh of relief. Borrowing money for college hit an all time interest low on July 1. This drop equates to a half a percentage cheaper than loans from last year.
The Skinny on Undergraduate Loans
Let’s dig deeper into the drop for undergraduate loans and lending and consider it from all angles. Last year’s 2015 rate of interest for borrowing college funds was at 4.29%. The new rate brings in a loan interest percentage of 3.76. So this drop in interest rates gives a nice bit of relief to those borrowing for the first undergraduate year degree.
Looking at Graduate Loans
There is good news for those seeking graduate loans, as well. If a graduate student takes out a direct loan from a lending group, the change will move from 5.84% last year to 5.31% as of July 1, 2016.
If the graduate student choses to instead use a PLUS loan, the move of the rate will be from 6.84% to 6.31%. According to the United States Department of Education, “PLUS loans are federal grants that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.”
Why the Drop? Understanding the Reasons.
Interest rates for federal loans are tied to 10-year Treasury note rate. This has been the case since the year 2013, when the United States Congress determined that interest rates should be reset yearly dependent upon the existing market conditions. The 2016 market conditions were favorable for a deduction in interest rates for college loans.
Investopedia.com defines a 10-year Treasury notes as, “a debt obligation issued by the United States government that matures in 10 years. A 10-year treasury note pays interest at a fixed rate once every six months and pays the lender at maturity. An advantage of investing in 10-year Treasury notes, and other federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level. “ So the rates are set on July 1 of each year, but the borrower locks into that borrowed interest rate for the span of the loan. 2016 rates were favorably lower, so the decrease was implemented.
The newer and lower rate of interest for college loans is exciting, however, you have to consider several other criteria when you are getting ready to borrow for college. There are many things to consider. Closely look at:
• Other repayment options and/or repayment length-if you can pay an additional amount each time, you will, of course, decrease the payment time frame. Additionally, if the opportunity arises for you to get a loan at a lower rate, you should obtain the lower interest rate loan and then pay off the higher loan. These fixes are obvious, but people often forget to explore them on a regular basis. You should set aside a day of investigation once a month to see if you could reduce the payments or change up the loan all-together. You might be surprised at what you can do to lower the payments or decrease the repayment time period.
• Origination fees-with a federal college student loan, the origination fee is a requirement. Often people forget to factor this fee into their anticipated payment amount. The origination fee is a percentage of the total amount of the loan you borrow. It is paid by a parcel of each loan distribution that you get. It will be taken off the top of that borrowed amount.
Private student loans, which tend to have higher percentage rates of interest than federal assistance, will also charge an origination fee to the borrower. It will be taken out of the dispersed funds just like for a federal loan.
It is exciting that the college loan interest rate has dropped for the year 2016. And keep in mind, that once you borrow during 2016, you will be locked into that lower more desirable rate for the duration of the loan. So, if the rate of interest were to increase in 2017, your loan interest rate would not increase.
No one knows what the year 2017 will hold as far as college loan interest rates, but we all know that students will continue to apply for college, they get accepted to college, and then millions of them take out loans for college. Luckily for the millions who take loans in 2017, the interest rate will be lower!