Here is How the Recent Fed Rate Hike Affects Student and Parent Education Loans - Association of Certified College Planning Specialists

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Here is How the Recent Fed Rate Hike Affects Student and Parent Education Loans

student loans,

Here is How the Recent Fed Rate Hike Affects Student and Parent Education Loans
image credit: Day Donaldson

The Federal Reserve raised short-term interest rates on December 14, 2016, up to a range of 0.5% - 0.75%. This is only the second time the Fed raised rates in almost a decade, the last time being in December 2015. Now they are looking at 3 potential rate hikes in 2017 alone.

However, these rate hikes will not affect your clients until 6-30-2017. Here are the current student loan rates and fees:

Loan Program     Interest Rate      Loan Fee Points 
Direct Subsidized Stafford Loans   3.76%   1.068%
Direct Unsubsidized Stafford Loans   3.76%   1.068%
Direct Graduate Stafford Loans   5.31%   1.068%
Direct PLUS Loans   6.31%   4.276%

 

Now if your clients are just entering, or are already in college, and taking out loans to help pay tuition; there is a good chance they will pick the PAYE, or REPAYE programs. These are income-based loan payoff programs in which monthly payments are maximized at 10 percent of the student’s discretionary income after college. Generally, these payment plans will not be affected by increased interest rates, until the student reaches a certain income level.

But what does 3 potential rate hikes in 2017 mean for your clients who carry Federal Family Education Loan (FFEL) student loan debt? Very simply, borrowing will get more expensive. For these clients, you may want to consider these potential strategies to capitalize on rising interest rates in 2017.

Refinance

If your client has student loans with high rates, refinancing them could be a smart strategy. There are some good lenders offering excellent student loan rates today, but with interest rates on the rise in 2017, these lower rates may become scarce. So this might be a good time to refinance and lock in a lower interest rate.

Switch to a fixed rate loan

If you carry student loans with variable rates, those rates will go up in 2017. This is another good reason for your client to consider refinancing and replace their variable-rate loan with a fixed rate loan. Especially if the student carries a better credit rate today than when they originated the variable rate loan.

Switch to an income-sensitive repayment plan

The income-sensitive repayment plan is not available for loans in the Direct Loan program, it is only available to borrowers in the Federal Family Education Loan (FFEL) program. The formula for determining the monthly loan payment amount under income-sensitive repayment can vary from lender to lender, but usually, the payment is based on a fixed percentage of gross income, between 4 percent and 25 percent. The income-sensitive repayment plan is usually best for borrowers with low-income or financial difficulty, but it is yet another way to beat rising interest rates.

So if you currently have clients with students in college (or out) who have FFEL student loans, you may want to contact them with this information and offer other services they may need.



 

 
Ron Them

Ron is the original co-founder of the National Institute of Certified College Planning. For over 20 years, the nation's leading financial advisors, broker/dealers, and major media outlets have been using his research, funding strategies, training, and insight. Ron is highly regarded as an expert in the college funding field.

He is a former Chief Financial Officer of a Fortune 500 company and currently owns his own financial advisory company specializing in cash flow planning for business owners and executives. He developed the Cash Flow Recovery® process that uses cash flow management principals to increase asset value and build wealth for business owners.

He is also the originator of several software calculators to help advisors and families make college affordable, including:

  • College QuikPlan EFC Calculator
  • "Find the Money" College Cash Flow Calculator
  • College Debt Reduction Calculator

Ron has been quoted in U.S. News and World Report, Kiplinger's Personal Finance, Smart Money, Financial Advisor Magazine, Small Firm Profit Report, Practical Accountant, LIMRA's Market Facts, Senior Advisors Magazine, HR Magazine, BenefitNews.com, Employee Benefit News Magazine, ProducersWeb.com, Entrepreneur Magazine, Insurance Selling Magazine, CollegeNews.com, The Christian Voice, and Columbus CEO Magazine.

 

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