The price of a college education jumped this month with the introduction of higher interest rates on federally guaranteed student loans.
On July 1, the interest rate on existing, federally guaranteed student loans increased by nearly 2 percent.
The hike adds about $20 to the monthly minimum payment on $20,000 in student loans, Sallie Mae reported.
Also as of July 1, all new, federally guaranteed student loans carry a fixed interest rate of 6.8 percent, as opposed to a variable interest rate.
The fixed interest rates on new loans could benefit students and parents in future years, especially if interest rates in the general market continue rising, said James Boyle, president of College Parents of America, a nonprofit advocacy organization for current and future college graduates.
“But the trade-off is that the interest rates are higher than they’ve been in previous years, so in the short term there’s a negative impact for this coming academic year,” he said.
The changes that took place July 1 apply only to federally guaranteed student loans such as Stafford loans and PLUS (Parent Loan for Undergraduate Students) loans — and not private loans.
While new Stafford loans carry a fixed interest rate of 6.8 percent, new PLUS loans, which are available to parents, as well as graduate and professional students, carry a fixed interest rate of 8.5 percent, said Martha Holler, managing director of corporate communications for Sallie Mae, the nation’s largest student loan provider
“This was the second consecutive year of rate increases for the (existing) variable rate loans, and prior to that there were several years of steady decreases in loan interest rates,” she said.
“Essentially from 2001 until 2004, rates dropped on student loans to historically low levels. The rates that were in place before July 1 were the fourth-lowest in the 41-year history of the student loan program.”
The interest rates on the existing loans represent a “return to what has been more of a historical average on student loans,” Holler said.
Sallie Mae issues about $21 billion in student loans annually and has about 10 billion customers.
“Over time, they’ve averaged around the high 6 percent to low 7 percent, and so that’s what we’re seeing,” she said.
The higher interest rates on federally guaranteed student loans may make private loans a more affordable alternative because they may include lower interest rates, Boyle said.
However, private loans usually are not available to students without a cosigner, he said.
“The private loan is almost always co-signed by the student and their parent because the student is unlikely to have the type of credit history that would allow him or her to get a private loan,” he said.
In the meantime, the default rate on existing student loans remains less than 5 percent, Boyle said.
“That doesn’t mean former students are not struggling to repay those loans, but they seem to be meeting that struggle in most instances,” he said.