Poor Student No More

We live in a nation in which higher education has become the goal of many, a necessity for most, and certainly a step in the right direction toward achieving the “American Dream.” Politicians base entire speeches on the promise of ensuring the opportunity to go to college exists for all. Teachers in primary and secondary education design their curriculum to prepare students for college, not necessarily for life (which is why we have such a problem with personal financial education — but I won’t digress to that topic here).

Since a college education has become such a commodity (with such a high price) in our nation, wouldn’t you think the government would offer students more opportunities and incentives to go?

There are federal loans (of which only some are subsidized) and grants, but overall, the federal government has not done an adequate job of protecting students from the debt trap that college can cause. Quite ironic considering they are encouraging American youth to go to college and achieve their dreams.

So, what is our government doing to protect students from high interest rates, defaults, and unforgiving lenders? What happens when higher education’s promise of a better financial future isn’t kept?

Right now, Congress is considering ending a program that backs private loans with government money. Instead, the money used to back the private loans would go directly to students, increasing the funds available for Stafford, Perkins and PLUS loans. This would not only save the federal government money, but also save students from high interest rates, unforgiving deferment policies and ridiculous calls from lenders telling you it’s time to start paying up. Yes please.

The most important legislation, however, comes from state legislatures. When there are budget cuts in the state, student aid often goes down, tuition for state universities goes up, and student debt goes up. For example, New York is thinking of cutting its student aid programs mid-year in response to a huge budget cut.

Jon Chattman wrote an article for The Huffington Post arguing that forgiving student debt would stimulate the economy because it would put extra money in pockets without decreasing taxes or giving stimulus packages.

Debt forgiveness is extremely rare, but there have been some ideas floating around Congress in recent years. The late Senator Kennedy introduced the Student Debt Relief Act of 2007 that increased the Pell grant, introduced a student aid reward program, cut interest rates in half, and offered fair payment assurance — meaning that there were less restrictions on granting forgiveness for all or part of student loans.

Keep pushing for more protection for students against private lenders, especially at the state level!

Student debt, credit cards and any other liability can pose a serious threat to personal finances because of interest rates. We seem to be bombarded by the phrase “interest rates” in business, financial and economic news — but what does it all mean, and what kind of impact will it have on your personal finances?

Let’s start with a basic definition: An interest rate is the price a borrower pays to use money from an external source. They are normally expressed as a percentage of the loan amount (Ex: My credit card has an annual interest rate of 13.8%). Another way of thinking of interest is the difference between the amount paid back to the lender and the original amount loaned. Interest rates create profits for lending companies.

The Federal Interest Rate

• Federal Funds Rate - The interest rate at which private depostitory insitutions (banks) lend federal funds to other banks. The Federal Open Market Committee (part of the Federal Reserve) sets the target interest rate (nominal interest rate), which is what is meant when it is reported that the Federal Reserve increased or decreased the interest rate. The effective interest rate — the weighted average of all interest rates in lending transactions between banks — falls within a range of this target interest rate. This rate affects short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit available, and a variety of other economic variables.
• Generally, interest rates charged by private lenders to you are largely based on the federal interest rate.

How can your interest rate change?

• The economy changes - in general, if the economy slows, interest rates go down to increase lending and borrowing.  If the economy grows, interest rates generally go up as there is more demand for loans.
• The lower your credit score, the higher your interest rate. Check to see if you have a variable interest rate (most loans do) — this means that they can change the interest rate at any time. MAKE SURE YOU DON’T DEFAULT AND KEEP YOUR CREDIT SCORE UP!
• These two factors play into determining interest rates the most — Macro and Micro causes — the state of the national economy and the state of your individual economy.

How can you lower your interest rate?

• Consolidate — consolidation can often decrease the total amount of interest you are paying, but be wary! Make sure you are proactive in reading the terms and conditions of your consolidation.
• Pay more each month — even just a few dollars a month can add up to a huge savings in the long run. Don’t short yourself though. Make sure you can afford what you are paying.
• Debt forgiveness — sometimes students working in the public service can have a portion or all of their debt forgiven. The most common example of this is the Peace Corps. However, this does not always apply to private loans.
• Talk to your lender — often, this is your best resource. Sometimes you can negotiate a lower interest rate or find out if there are any special benefits that you are qualified for. So pick up the phone and talk to a loan officer.

Please note — all Federal loans taken out after July 1, 2006 have a fixed interest rate.

Current interest rates:

• Stafford Loan (subsidized undergraduate) — 5.6% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loan (subsidized graduate/professional) — 6.8% for loans disbursed from July 1, 2009 - June 30 2010.
  
• Stafford Loan (unsubsidized undergrad/grad) - 6.8% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loans disbursed after July 1, 2006 - variable but will never exceed 8.25%
  
• PLUS loan (disbursed before July 1, 2006) — variable but will never exceed 9%. Currently 3.28%
• PLUS loan (disbursed after July 1, 2006) — 8.5% fixed
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