Federal financial aid interest rates rise for 2005-2006 school year

It's estimated that 55 percent of Carnegie Mellon undergraduates borrow some kind of financial loan to pay for their college education, and now that loan will be more expensive to repay, thanks to a rise in federal financial aid interest rates. The rise, which went into effect earlier this summer, raised the interest rate on most federal loans, including Federal Stafford Loans and Parent Loans for Undergraduate Students (PLUS). Previously, interest rates on these loans had been at their lowest level in forty years.

The Federal Stafford Loan, which for the 2004-2005 school year had a 2.77 percent interest rate for students still in school, became 4.7 percent on July 1, according to Molly Seltzer's article "Rising rates pique interest." For graduates repaying their loans, the interest rose from 3.37 percent for the 2004-2005 school year to 5.3 percent for the 2005-2006 year.

Because PLUS loans are borrowed primarily by parents, repayment begins 60 days after the second dispersement, not after graduation. The interest rate for PLUS loans in the 2004-2005 school year was 4.17 percent. In the 2005-2006 year, it is expected to peak at 6.1 percent.

"They're [the federal government] raising this rate to keep foreign spenders interested and the dollar strong," said Bonnie Lack, Director of Financial Aid at the Tepper School of Business. Referring to the 2.77 percent interest rate, she said, "We will never see that again."

However, Lack added that the interest rates are still fairly low for today's market. In addition, federal law stipulates that the interest rate of Federal Stafford loans can never go above a certain level. "The beauty of the Federal Stafford Loan," Lack said, "is that it can never go higher than 8.25 percent."

Director of Enrollment Services Linda Anderson also stressed that interest rates were still favorable for students who wanted to borrow. "You really have to put it into perspective," she said. According to Anderson, Carnegie Mellon students are considered good risks for federal loans, since they can generally find a career immediately after college and begin repayment. "It's worth the investment," said Anderson.

In order to minimize their payments after graduation, students were urged to consolidate their loans before July 1, 2005, when the new interest rates went into effect. When a student chooses to consolidate their loans, the weighted average of the student's interest rates is "locked in" as the new rate. Anderson explained that for students who consolidated before June 30, 2005, the interest rate could have been as low as 2.875 percent for the lifetime of the loan.

Anderson sent two letters to enrolled students and recent graduates in May 2005, explaining their options. One letter begins: "As a recent graduate, in-grace loan consolidation can be the key to saving thousands of dollars over the life of a consolidation loan."
While consolidation is generally considered a good option, Lack stressed that it might not be the best choice for everyone. "We talked with our students individually to see if it was right for [them]," she said. For those who had borrowed subsidized money and were not being charged interest, consolidating loans would not be the best choice available. In addition, Lack mentioned that students are offered a six-month grace period once they graduate to prepare for their repayment of Federal Stafford loans. If they chose to consolidate their loans before July 1, they were required to forfeit that grace period.

Anderson agreed that consolidating loans might have resulted in the loss of certain "borrower benefits" but that "the savings were very much worth it."

Both Lack and Anderson emphasized the importance of students researching and exploring their financial options. According to Lack, loan counseling is especially important for the Tepper School, as roughly 80 percent of Tepper students borrow some sort of loan. "We do not just talk to our students about what's available, but we also do credit counseling for them," said Lack. Anderson added that students needed to be "informed and educated about repayment."

According to Anderson, Federal Stafford Loan interest rates are projected to rise again in the 2006-2007 year, to 5.24 percent for enrolled students and 5.84 for students in repayment. However, she said, "Educational loans are still a worthwhile financial decision." With interest rates still significantly low, "borrowing really does make fiscal sense."