The Federal Direct Loan Program (FDLP) provides 89% of all postsecondary educational loans. Unfortunately, FDLP loans will soon become more expensive to borrow.
FDLP interest rates are set every May for loans made from July 1 through June 30. The 2018-19 rates will be 0.6% higher than in 2017-18, making this the third year in a
row during which they have risen.
Note: FDLP loans are “made” from July 1 through June 30 if, during this period, any portion of their initial installments go directly to students or are applied applied to what they owe their institutions.
Higher rates increase borrowing costs. For example, what if the lower 2017-18 interest rates versus the higher 2018-19 interest rates were to remain in place for the next four years? Depending on the borrower’s choice of repayment plan, the total amount repaid to the FDLP under the higher rates would jump by up to:
- $2,755 for undergraduates borrowing the maximum amount each year for four years;
- $7,144 for parents borrowing the national average of $10,226 per year to help their undergraduates earn four-year degrees; and
- $7,338 for two-year master’s degree students borrowing $25,000 per year.
Why are rates rising? Federal law ties the interest charged on each FDLP loan to the rate at which the government auctions off 10-year Treasury notes every May. The rates at which such Treasury notes are auctioned rises as the economy improves, which it’s been doing since late 2015, so FDLP interest rates have been rising, too.
And assuming there’s no economic recession for the next few years, future FDLP interest rates will climb even higher.
Good news? Federal law fixes FDLP interest rate until loans are totally repaid, so their interest rates never rise. This helps make FDLP loans better than the “variable rate” educational loans offered by many private lending institutions.
Still, rising FDLP rates make college less affordable unless borrowing is reduced. Fortunately, there are ways to do this and still get a quality education, including, but not limited to:
- Reducing educational costs for which students and parents would otherwise borrow with transferable courses taken at community colleges before or during university enrollment, not dropping courses, and timely graduation;
- Controlling in-school living costs by avoiding credit card traps, carefully managed spending, leaving cars at home, judiciously choosing off-campus residences and thoroughly examining such residences’ leases.
- Cutting indebtedness by prepaying unused loan funds while enrolled, spending graduation money to lower college debt, and paying down accumulated interest during the six-month “grace period.”
So make plans now, because it’s going to be more important than ever to minimize college debt for 2018-19!
College Affordability Solutions brings 40 years of personal college finance and student loan experience to it’s no-cost consultations with customers. Contact it at (512) 366-5354 or collegeafford@gmail.com for such a consultation.
