Loan rates for student loans have been steadily rising over the years. However, many people do not understand why they rise or factors that lead to the constant increment. Many keep asking, “why are student loans interest rates so high?” The government amends student loan interest rates each year. This process is in accordance to a piece of legislation passed in 2013 whereby interest rates depend on the high turnover of the ten-year treasury note during the last auction which takes place before the 1st of June.
After that, the agreed upon rates remain in effect for the next twelve months for loans disbursed between July and June of the subsequent year. As a result, those who received loans in the previous year don’t become affected by the new changes.
After the auction takes place, interest rates are after that derived by adding specific percentages to the yield of the ten-year treasury note. This process intends to cater to the administrative costs of disbursing the loans concerning the 2013 legislative amendments responsible for establishing this system. To calculate the interest rate for undergraduate loans you add 2.05 percent. When it comes to direct unsubsidized loans, you add 3.6 percent. Finally, for the plus loans, you will add 4.6 percent. All these facts clearly show the processes that rise loans interest rates.
Legislation on Interest Rates for Student Loans
The Congress enacted an act that places a cap on maximum interest rates to help curb the issue of high interest rate loans. This move will help students manage their loans without financial constraints. However, the current limit set by Congress is still considerably high. Interest rates on government student loans for undergraduates cannot rise beyond 8.25 percent. Rates for graduate students under direct unsubsidized loans cannot exceed 9.5 percent and for PLUS loans the set limit is 10.5 percent. What this means is that the rates will still increase substantially for some years to come.
Comparison of Student Loan Interest Rates between 2017 and 2018
The table below provides a side by side comparison between interest rates on student loans 2017 and 2018.
From the table, it is clear that the current interest rates on student loans are higher than that of previous years.
Viable Techniques of Lowering Your Interest Rate on Student Loans
Usually, a student has few options when it comes to reducing interest rates. However, the following are two of the most suitable methods of lowering interest.
- Direct consolidation loan
If you are concerned about what are the interest rates on student loans, a good plan to select would be a direct consolidation loan. This is a loan mostly available after completing your college education. What it does is that it combines all or majority of your federal student loans. Nonetheless, this method can either lead to an increase or decrease in your interest rates. The interest is calculated through finding the average of all the consolidated loans rounded off to the nearest eighth of one percent.
The result is that if your loans with the highest arrears have the highest interest rates, your average rate might increase. But if your highest unpaid loans have the lowest interest rates, your average will also decrease. It is therefore advisable to seek a consolidated loan if your loans with the most accrued balances have the least interest. One advantage of this loan type, however, is that it contains all the benefits enjoyed by federal loan borrowers. These include loan forgiveness, income-determined repayments, and deferrals.
- Seeking a private lender
Private lenders usually have substantially lower interest rates compared to the federal system. However, some private lenders might not offer loan forbearance or deferment as is the case in federal loans. The lender will charge you interest over the entire period you spent in college. Furthermore, there is no possibility of suspending payments if you go back to school, experience financial constraint or join military service. Benefits such as student loan forgiveness and income-based payment might not apply to this kind of borrowing. But before borrowing, you need to confirm what are the interest rates for student loans from your private lender.
Proven Methods of Solving “Why Are Student Loans So High” Issues
Students can use specific methods to lower the interest amount. Below are some of the best methods.
Student Loans Paying Interest on the Fly
If you have an unsubsidized student loan, you will accrue interest during your study, the grace period and if you defer your academic activities. Subsequently, if you wait to start repaying the loan once you get a job, you will pay interest on the already accrued interest.
The Current interest rate on unsubsidized student loans are on the rise and delaying payment might lead to huge debt. It would, therefore, be a brilliant idea to repay the interest as it accumulates. Direct subsidized loan borrowers are not affected by this situation because the education department will pay their interests while in school, during deferment and the during the grace period. Therefore, the interest rate on government student loans remains minimal in the first few months after the repayment period commences
Paying More than the Set Premiums
Whenever you receive a student loan, the lender will always send a monthly report detailing the amount you owe. You can decide to pay an amount higher than your premium which in turn offsets your principal balance. This method plays a significant part in reducing high interest rate student loans in the long run. The technique is much better than refinancing a loan to a shorter period if you are concerned about making higher mandatory monthly payments.