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College debt has reached record levels. It almost tripled between 2004 and 2012, and is approaching $1 trillion. Student debt is now the second largest form of consumer debt, behind home mortgages and well ahead of credit card and auto debt.
People need a college degree to compete in today's high-tech job market. At the same time, college tuition has soared over the past decade while median family income has decreased. People need college degrees in order to compete, but can't afford them out-of-pocket. They must borrow.
Borrowing for College
One-third of all college students use federal loans to help pay for an education. For academic year 2013-2014, this will be 9 million people. Student loan borrowers graduate with an average debt of $27,000.
The three most common kinds of federal loans (often called Stafford loans) are:
- Subsidized – loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. The interest rate is 3.86 percent, you can borrow up to $8,500 per year, and the federal government pays your interest as long as you are enrolled in school.
- Unsubsidized – loans made to eligible undergraduate, graduate and professional students. The student does not have to demonstrate financial need to be eligible for the loan. The interest rate for undergrads is 3.86 percent, you can borrow up to $12,000 per year, and interest accrues while you are enrolled in school. The rate for grad students is 5.4 percent.
- PLUS – loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. The interest rate is 6.4 percent. PLUS loans come with a four percent origination fee.
Interest Rates Now Subject to Change
In August 2013, President Barack Obama signed the Bipartisan Student Loan Certainty Act of 2013. This law decreased interest rates on student loans, but also tied them to the 10-year Treasury note going forward, plus an added amount. The added amount is 2.05 percentage points above the base rate for undergraduate loans, 3.6 percent for graduate loans, and 4.6 percent for PLUS loans.
Under this formula, the interest rate for federal loans will now change from year to year, and will be on pace to exceed any previous rates in two or three years. The amount that they can increase is capped at 8.25 percent for undergraduate rates, 9.25 percent for graduate rates, and 10.5 percent for PLUS rates. When interest rates go up, students will pay much higher rates.
Student Loans Must Be Repaid
Students must begin repaying their federal loans six months after they graduate, usually over a 10-year term. If monthly payments are too high, borrowers may ask for an extended repayment period, a graduated repayment plan (in which payments start low and increase over time) or an income-based repayment plan.
There are also special repayment plans for graduates employed full-time by the government, certain non-profits or other eligible public service employers.
