Student Loan Rates to Rise

If you are a student or the parent of a child that will be taking out a student loan to attend a 4-year college or university in the fall, there is some news that will affect your wallet. According to a recent U.S. Treasury bond auction for student loan debt, the rates for loans made for the 2014-15 school year are scheduled to increase. Undergraduates will see their rates rise nearly 21% from 3.86% to 4.66%. For those attending graduate school this fall, rates will increase 15% from 5.41% to 6.21%.

With current student loan debt at or above $1 trillion, surpassing credit card and auto loan debt according to the New York Federal Reserve Bank, the situation will only get worse in coming years. It is projected that interest rates will rise in the coming years, adding to the cost of loans for students looking to defray some or all of their college costs. Student loan rates were capped at 8.25% for undergraduates and 9.5% for graduate students through a bi-partisan effort to lower rates in 2013 and have created a situation for projected higher costs nearing the cap over the next 4 years, making the need for financial planning and financial portfolio management more important than ever. 

What the Rise in Student Loan Rates Means

The rise in rates for students attending college this fall will result in higher out-of-pocket loan costs. For an undergraduate borrower taking out the maximum direct Federal loan amount for a dependent student over the entire 4-year period beginning in 2014, their projected loan costs will be over $1,600 (based on CBO projections). The total cost of the loan with student loan rates projected to rise annually will result in an additional $2,000 in loan interest costs over the pay-off period.  Graduate students, who have the ability to borrow up to $20,500 per year in direct Federal aid, will face even higher interest costs based on projected student loan rates.

Ways to Meet Your Expected Costs for School this Fall and Avoid Student Loan Debt

It is not too late to consider how your financial portfolio management techniques can help you lower some of the expected loan interest costs coming up this fall and avoid future student loan debt. Through a systematic plan of savings and investments, choosing those vehicles that yield rates that are above the anticipated student loan interest rates (i.e. high-yield bonds and equities, as well as growth mutual funds, as examples) may help you lower your costs. You should look to employ certain financial management techniques such as diversification, asset allocation and other methods for your savings and investments designated to meet upcoming college costs.

For financial advice on how to avoid student loan debt, savings & investments strategies and financial portfolio management services, please contact Lighthouse Financial Planning.

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