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Your child may be receiving their college admissions results soon, and along with that a financial aid package. For many, the financial aid package can include a combination of grants, loans and work-study programs. While grants are certainly preferable, it is worth noting that federal student loans for 2020 are now looking a lot more attractive than they used to, with interest rates significantly lower than prior years in many cases.
Just like mortgage companies have reduced mortgage interest rates in 2020, the federal government reduced interest rates on Direct Subsidized and Unsubsidized Loans to 2.75% for undergraduate borrowers. Rates for graduate students and for parent loans are higher than this (4.30% and 5.30% respectively), but these too are much lower than they have been in many years.
PRO TIP
The COVID-19 student loan relief on existing loans has been extended. The 0% interest and suspension of current payments that went into effect on March 13th due to the pandemic has been extended to January 31st, but be prepared to restart payments on existing loans in February!!
Now, just because you are offered loans in your financial aid package doesn’t mean that you or your child have to accept them. First, there are fees associated with most federal loans that you need to be aware of. The current fees on Direct Loans for students are 1.057% which is deducted proportionately from each loan disbursement you receive while enrolled in school.
The fees for the Direct PLUS loans for parents are quite a bit higher at 4.228%. In addition, keep in mind that unsubsidized loans will start accruing interest right away even if the first payments are not due until after graduation, so these loans are not as attractive as subsidized loans. And you also need to weigh your alternatives – many families are finding that they are able to get a lower interest rate on a home equity loan to finance college, with no or minimal additional fees.
Take a look at the article below for more information about the type of student loan that applies to your situation, or I would be happy to set up time to talk with you to discuss whether student loans make sense for your family.
Understand how interest is calculated and what fees are associated with your Federal Student Loan:
Neil Manning, CFP, AIF is a Financial Planner with Gateway Financial Partners.
