As college students everywhere prepare to go back to class, they and their parents are also faced with bills for tuition and other college expenses.
It is not uncommon to take out a student loan to fund school. But the interest rate you pay on those loans went up this fall. Vicki Beam is a financial advisor at Michigan College Planning in Traverse City. “A lot of them are probably getting their bills right now and are figuring out how to pay them.”
Carol Crawford is a college senior parent and has one other student who is fast moving into high school. “My oldest son is 20 now, and he’s at Michigan Tech,” she says. The thought of paying for college is hard to shake off. “How are we going to pay for that? We knew student loans existed. We hoped we didn’t have to do that, and he definitely didn’t want that. He didn’t want to be burdened with that after he graduated.”
Crawford’s eldest son double-enrolled through NMC and got some college courses for free while he was still in high school. “He double-enrolled in high school and that helped. So he had an associate’s degree from NMC before leaving Traverse City. That helped enormously financially,” she says. “He also works full-time. He’s very motivated. We helped him where needed, but luckily we didn’t have to take out student loans.”
And even if tuition fees don’t go up this year, the cost of student loans will. This is due to the rate hikes by the Fed, which is raising interest rates across the board. “Part of the time, they usually pay with student loans. And they’re now finding that student loan rates have gone up, as has every other interest rate out there,” says Vicki Beam. “A year ago it was 3.73%. And the interest rate on the student loan is 4.99%. So it’s up a little over 1 percent.”
That means it will cost more to pay off those loans — although it’s still generally cheaper for parents to get a student loan than it is for parents to take out a four-year personal loan, Beam says. “Newcomers can borrow $5,500, sophomores can borrow $6,500, and then junior and senior year students can borrow $7,500 each.”
“The most important thing to know is that your student will probably end up leaving with four individual loans with four interest rates. That interest rate stays on the loan for the duration of the loan until it is paid off,” says Beam. “Parents PLUS loans increased again this year. And we note personal loans… which you co-sign, these depend on the creditworthiness of the parents. So these rates can be quite high, (even) double digits.”
Beam says it’s discouraging for parents and students. “They think about possibly borrowing $80 to $100,000 for four years.” She says there are grants and grants, even for current students. “We hear from many grant committees that they have no applicants. And so they don’t give away the money. You must have someone applying to get the scholarship.”
Many college graduates have experienced some relief from having to make loan payments during the pandemic. But those days may be coming to an end. “We haven’t had any interest or loans to pay since COVID. March 2020. That expires at the end of this month,” says Beam. This break could still be extended, but there is no word yet. And it is difficult to predict how interest rates will develop in the coming years. “It could go uphill. And if interest rates go down once someone finishes school, maybe they should consider refinancing to try to consolidate and end up with a lower interest rate.”
As for the talk among politicians about canceling student loan debt? “I would say whatever you borrow, you should plan to pay it back. When it is given, it is an incredible gift,” says Beam.
Michigan College Planning offers workshops and free consultations at its Traverse City office.
The Michigan Department of Treasury’s MI Student Aid Team urges students and their families to be vigilant and informed when considering student loans.
“Michigan students and families bear a significant portion of their higher education costs,” said Treasurer Rachael Eubanks. “When student borrowers become their own financial advocates, they can better understand how to manage and use the financial assistance they receive. Please think carefully about accepting only those loans that are needed. The choices students make today will have an impact later in life.”
To make the best student loan decision, the MI Student Aid Team recommends seven best practices when considering student loans:
- Complete the Free Application for Federal Student Aid (FAFSA). Colleges use information from the FAFSA to determine their financial aid. By completing and submitting the FAFSA, students maximize all of their financial assistance opportunities.
- Understand that loans must be repaid. Not all financial support included in a grant letter is free money. Many financial aid grants include federal student loans. Unlike grants and scholarships, loans must be repaid with interest.
- Check the level of interest offered on a loan before accepting it. Federal student loans, parental student loans (PLUS), and private loans have different interest rates and repayment terms. Before taking out a loan, students should determine the interest rate on each loan, compare them and then accept the loans with the best interest rates and repayment terms.
- Only accept the amount you need. Students can either decline a loan or apply for a smaller loan amount, and the letter of acceptance should include instructions on how to do this.
- Watch out for credit fraud. In a typical student loan scam, a scammer asks for banking information from a student who is looking for loans. The scammer usually claims they are using the information to make a direct deposit into the student’s account in exchange for upfront payments paid through gift cards. Instead, the scammer accesses the student’s bank account and withdraws funds.
- Visit the school’s grant office once a semester. While students may not have to start paying off their loans while they are in school, students should not wait until they understand their responsibilities. Students should know the status of their college or university’s student account and keep an eye on the type of support they are receiving. By making this a habit, students can avoid over-indebtedness and stay on budget.
- Create a studentaid.gov account. Maintained by the US Department of Education, the website is a one-stop shop for the administration of federal student aid. With a studentaid.gov account, students can keep track of their state student loans, check each individual’s interest rate, and the total interest accumulated to date. Students can also look at different repayment options, estimate monthly payments, and know who their loan officer is for when repayment begins.
For further information, click here.