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Federal Employees News Digest : Aug 19, 2013
U nder a new law recently passed by Congress, interest rates on federal Stafford loans will be tied to current market rates. Borrowing costs for college- bound students this fall should be lower compared to what they have been in the past. For the 2013-14 academic year, undergraduate students will pay 3.86 percent interest on unsubsidized federal Stafford loans. But with the anticipated increase in market interest rates, Stafford loan interest rates likely will increase in the future. With the new law, the interest rate on Stafford loans will be based on the most recent 10-year Treasury note auction rate prior to June 1 of each year plus 2.05 per- cent, and would cap at 8.25 percent. This means that college-bound students who take out Stafford loans during each of their four undergraduate years could have a different interest rate on their loans each year depending on interest rate market conditions. Once a student graduates or leaves college and must start repaying the loans, the monthly loan repay- ment amount will be based in part on the weighted interest rate aver- age of all unsubsidized loans taken out during the student's college tenure. At the most recent 10-year Treasury note auction held on May 15, 2013, the yield was 1.81 percent. When added to the 2.05 percent, the interest rate on unsubsidized Stafford loans this academic year will be 3.86 percent. The 3.86 percentage rate is lower than the previous 6.8 percent rate on unsubsidized Stafford loans. The rate on subsidized Stafford loans, available to students with financial need, is currently 3.4 percent. One important difference between subsidized and unsubsidized Stafford loans is that the government continues to pay the interest on subsidized loans while the student is in school and for the six-month period after the student graduates. With unsubsidized Stafford loans, interest accrues while the student is in school and is added to the loan balance. According to the Consumer Financial Protection Bureau, total student loan debt is approaching $1.2 trillion, including $1 trillion in federal student loans and an estimated $165 billion in private loans. Education-related debt is rising faster than credit card debt, and stu- dent loans are now the second largest form of consumer debt behind home mortgages. The escalating student loan debt and concerns about its long-term effect on today's young people has added to the pressure on parents of young children to think ahead about how to finance their children's future college education. The following are some sug- gestions for parents thinking about saving and paying for the cost of their children's future college education. • Start saving when a child is born, and continue saving on a regular basis. Ideally a parent will regularly save for a child's future college education starting when the child is born, even if only a relatively small amount. Saving $100 a month in an account that has an annual- ized after-tax investment return of 5 percent (such as a low-cost stock index fund) would result in a total sav- ings in 18 years of about $35,000. While $35,000 will not cover four years of tuition 18 years from now, it is a good start. And by saving in the parents' name, a child could still qualify for financial aid. • Get the family involved. Encourage grandparents to contribute to a college savings fund instead of buy- ing savings bonds for their grandchildren. Dollars regularly invested, particularly starting when a grandchild is young, have longer to grow and to weather the stock market roller coaster. By contributing to a college fund or by directly paying their grandchildren's tuition and fees, grandparents can also minimize the size of their estate subject to potential federal and state estate taxes. • If student loans are necessary, federal student loans should take priority. Students who are dependents can borrow at most $7,500 a year and up to $31,000 in Stafford loans. To qualify, students and parents must fill out the Free Application for Federal Student Aid (FAFSA). The school's financial aid office will tell students if they qualify for grants, scholarships or subsidized loans. Private student loans -- those loans obtained through a bank or another financial institution -- should be a last resort, even if their interest rates are lower. Repayment options for federal student loans are far more flex- ible compared to private loans. • Look at alternatives for borrowing. Tuition installment plans allow payments to be spread over the academic year or perhaps 12 months in order to pay the cost for two semesters at a college or uni- versity. These plans require only a small fee to set up and may work better for some families than making one or two large payments. Parents taking out Parent Loans for Undergraduate Students (PLUS) loans may want to compare PLUS loans with other options such as home equity loans. Home equity loans in which the interest paid may be fully tax-deductible usually have lower interest rates than PLUS loans. But home equity loans can be risky and make sense only if the parents have the discipline and income to pay the loans back as rapidly as possible. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor The new way of calculating interest on undergraduate student loans August 19, 2013 Vol. 63, No. 5 7 Visit us on the Internet at www.FederalDaily.com
Aug 12, 2013
Aug 26, 2013