American families have been benefiting from historic lows on student loan interest rates for the last decade or so. But, that’s all about to change this fall. According to a news report in The Washington Post, interest rates on federal student loans will increase by seven-tenths of a percentage point as a result of the Treasury Department’s auction of 10-year notes. The new rates will take effect July 1 and are good only for loans taken out to pay for the 2017-2018 academic year.
Student Loans Costlier
Undergraduate students can expect to pay 4.45 percent in interest on the new Stafford loans instead of the 3.76 percent they currently pay. So, a student who borrows $5,000 under the current interest rate will repay a total of $6,007 with interest over the standard 10-year period. But under the new higher interest rate, a freshman taking a $5,000 loan will pay $196 more in interest over 10 years.
Graduate students will see their interest rates go up from 5.31 percent to 6 percent, which means it will cost students $831 more in interest over the 10-year loan period. In addition, parents who take on federal debt to help their children pursue a bachelor’s degree can expect to pay 7 percent on a PLUS loan instead of 6.31 percent, which represents an increase of $423 over the loan period.
What Does This Mean?
Many students and families are forced to borrow money each year for higher education. So, these continued annual increases could take a toll on these families. If there are a few more rate increases over the next several years, a student who graduates with $31,000 in loans at a blended rate of 5.1 percent would pay about $5,000 more in total repayment costs. Students and families don’t have to panic just yet about this added cost.
However, experts warn that they should be aware of the increase and factor that into their repayment plans. They should also be aware that some colleges front-load their financial aid offers. This means that students may get less financial aid each year they enroll and may have to borrow more when they are juniors or seniors than when they were freshmen. Experts do expect a continuing upward trend on student loan interest rates because of the way markets are reacting to the Trump presidency.
While next July’s rates could be higher there are protections for families. Interest rates on undergraduate loans cannot go higher than 8.25 percent according to ceilings set by Congress. Similarly, graduate loans are capped 9.5 percent and the limit on PLUS loans is 10.5 percent. Experts say that federal student loans are still a better option for families compared to private loans because these interest rates are fixed and won’t go up in the future. They also come with crucial protections such as income-driven repayment and forgiveness for public-sector workers. Students with federal education loans can enroll in income-driven repayment plans that connect their monthly payments to a percentage of their earnings. In this manner, students with fewer earnings or those who suffer setbacks such as a job loss can better manage their payments.
Student Loans and Bankruptcy
However, with public service loan forgiveness at the brink of elimination and federal student loan repayment programs expected to be restructured, student loan borrowers have a lot of new information to process. However, the one thing that hasn’t yet changed is the inability to discharge your student loans in bankruptcy. While that is the general rule, there are certain special circumstances under which student loans may be erased in bankruptcy.
In order to be able to do that, a borrower must establish “undue hardship” under the Brunner test. This is a legal test where the borrower must show that he or she has extenuating circumstances creating a hardship and that those circumstances are likely to continue for the term of the loan. The borrower must also show that he or she has made good faith attempts to repay the loan. This means that you have to show that you attempted in good faith to make payments.
For example, if you tried to find a workable payment plan, that would count as a “good faith attempt” to repay the loan. In order to have a student loan discharged through bankruptcy, you must file an Adversary Proceeding in bankruptcy court claiming that paying the student loan would create an undue hardship. Remember, private loans cannot be cancelled as easily in bankruptcy. In addition, may private lenders require a co-signer. This means that two people are in trouble if the loan is not repaid.
Tips to Deal with Student Loan Debt
Here are just a few tips to help you deal with student loan debt:
- Take advantage of your grace period after you graduate (if your loan has one). Take this time to understand your loan, make a game plan and if possible, start making the payments.
- Choose the payment plan that works best for you.
- Continue to live frugally as you probably did in college even if you may have a job now. The longer you do so, the faster you can pay off your student loan debt. Stick to a monthly budget.
- See if you can earn more money. Pursue overtime or extra shifts or even part-time jobs opportunities.
- Don’t forget to deduct your student loan interest at tax time.
- Look for jobs that pay your debt or offer student loan forgiveness.
- See if you can volunteer for organizations such as AmeriCorps or the Peace Corps that offer some type of student loan forgiveness or reimbursements for your dedicated service.
- Signing up for automatic payments can lower your interest rates depending on your lender. Even if it may only be a small amount, it could make a significant difference over the loan period.
If you are stuck and are unable to make payments, contact our experienced Phoenix bankruptcy lawyers to find out filing for bankruptcy protection can help erase your student loans or buy you time to repay them at your own pace. Call us at 480-745-1770 to find out how we can help you.