There is a lot of chatter among grad school students about the high-interest rate the Federal government charges on student loans. Unfortunately, student loan interest rates will be even higher come July 2022.
This article provides a brief background on the student loan “interest rate calendar” and a potential strategy for students to consider in order to mitigate part of the impact of student loan interest rate increases.
Student Loan Interest Rate Calendar
Student loans are on an annual calendar that ends each June: the Federal government sets new student loan interest rates each June and those are the rates are from July 1st till the end of June the following year.
Federal student loan interest rates are determined each year by the rates of 10 year treasury notes (Treasury notes are loans sold to investors by the US Government). The student loan interest rate is set by adding a margin to the 10 year treasury. A margin is a fancy word for adding interest to the another interest rate.
Congress adds a margin of 2.05% to undergrad loans, 3.6% to graduate loans, and 4.6% to PLUS loans.
Following is an example of how the student loan interest rate calendar works. If for example, you are a graduate student, your interest rate on any “Non PLUS” Federal student loan disbursed before June 30, 2022 would be 5.28%. After July 1, 2022 the interest rates will rise to approximately 6.43%.
This means, for every $10,000 you borrow for grad school, you’ll pay approximately $700 more over the life of the loan assuming you are using a standard 10 year pay off plan.
A Strategy To Think About
Current Federal student loan interest rates are as follows:
Undergrad interest rates: 4.99%
Graduate interest rates: 6.54%
PLUS interest rates: 7.54%
Financial experts predict that interest rates will continue to go up for the foreseeable future. This means that there is a high probability that student loans interest rates will go up again in July 2023.
If you know you will need to borrow more money after June 2022 and have not yet max out how much you can borrow, then you may want to contemplate the following strategy:
If you are currently not taking out the maximum in student loans this semester/quarter, you may want to max this out anyway and put the extra money you don’t currently need in the bank for now. That way, you have “cheaper money” available for future expenses and can put this money “to work” in an interest bearing account until you need it.
The primary benefit of this strategy is having a lower interest rate on your loans, which will save you money over the long run when you are in repayment.
Loans aren’t cheap. If you are taking the loan today, two things will happen:
- You will start deferring interest immediately. In other words, your loans, whether or not you start using them immediately, will start accruing interest right away.
- In addition, you will have to pay an origination fee, which we call the “the fee you’re charged for the privilege to borrow.”
Fees on Federal student loans range from 1.057% to 4.228%.
In short, there is no free money…
So what exactly should you do? There is no cookie-cutter answer because one needs to take into account 1) the unknown timing of potential future rate increases and 2) how much additional loans one will need to take.
Therefore, if you are contemplating implementing this strategy, I highly recommend speaking with your FitBUX Coach so you can customize your solution and see if it makes sense for you to implement.
By Joseph Reinke, CFA, CEO of FitBUX