Student loan interest rates are set to go up next week and Carmen Berkley, an Black student leader with five college loans and some knowledge of the financial aid system, doesn’t know what to do.
“It’s very daunting, and I still don’t understand it. I don’t think a lot of students understand,” says the University of Pittsburgh senior who worked with a national lobby group in Washington, D.C., to protect student interests. But she is besieged by advertisings and mailings urging her to consolidate her various loans, which total more than $50,000. And, the ads say, she should do this before the July 1 rate increases on Stafford student loans and parent PLUS loans.
Berkley and thousands of other college students will have to come to grips with a shifting student loan market. Gone are the low interest rates of recent years, replaced by higher variable rates that will add up to larger repayments after they leave school. In some cases, rates would creep up by about 2 percentage points.
“We’ve had a solid decade of happy news on interest rates,” says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “That’s coming to an end.”
For minority students, the rate increase may also increase their reticence about incurring large college loan debts.
While interest rates alone may not persuade minority students to put off their education, it is one of several trends that may affect access, says Thomas Mortensen, a higher education analyst with Postsecondary Education Opportunity.
“Higher interest rates, along with freezing the Pell Grant maximum and escalating tuition, works to the disadvantage of low-income minority students,” he says. As a result, more may attend lower-cost institutions or delay college.
“Poor people are inherently risk-averse,” Mortensen says. “For low-income people, college is a risky investment to begin with. Borrowing against future income is pretty scary for people who survive day-to-day.”
Rates on existing Stafford Loans are expected to increase nearly 2 percentage points, to 6.7 percent, after July 1. Rates on existing PLUS loans will jump to 8 percent.
Under law, rates on these existing loans vary each July based on the yield of 91-day Treasury bills. In the past year, the Federal Reserve has repeatedly raised interest rates in a move to stem inflation.
Interest rates for new Stafford and PLUS loans will also jump based on legislation the U.S. Congress approved last winter to cut federal spending.
Lenders say the answer for most students is a consolidation loan, through which borrowers can combine their various loans under one interest rate. The rate would be a weighted average of existing loans rounded to the nearest 1/8th of a percent.
“Student loan consolidation is the best way to protect yourself from a very significant interest rate increase on July 1,” says Keith D’Ambra, senior vice president of loan consolidation for Sallie Mae, one of the nation’s main loan providers.
Loan consolidation can result in a rate as low as 4.75 percent, according to Sallie Mae. The lender says it also provides an additional discount for those who make on-time payments for a three-year period.
Nassirian agrees that consolidation loans are “highly advisable.” But he says there’s little incentive for students to act on the loans this summer since they generally do not begin repayment until they leave school.
Students also are not very price sensitive to interest rates, he says, since their first goal is to obtain the necessary college funds. In addition, many youth tend to “exaggerate their earnings potential” in the years after graduation, Nassirian says.
– Charles Dervarics
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