On July 1st of this year, the government made a decision regarding federal student loans. The interest rates on these loans hiked from 3.4% to 6.8%. The house literally doubled the interest rate. So what exactly does this mean for you, the borrowers?
One thing to remember is that interest does not accrue while you’re in school. So, while you’re studying or partying (whatever experience you’re paying for), nothing will change. Normally, graduates have a six month grace period after graduation before they begin paying off said loans. It is during repayment that borrowers will face a mighty challenge. This is when that interest rate will begin to accrue, and you will face much bigger payments.
It’s hard enough finding a good-paying job after college, but with a doubled interest rate looming over our heads, things are certain to take a downward spiral. Let’s say, for the sake of numbers, that your payments are roughly $225 a month, provided the 3.4% interest was still in play. With numbers like that, the borrower, over a ten-year time period, will be paying about $4,000 worth of interest. While that number is high, remember what happens when the interest rate doubles. That means your interest will double. Now you will end up paying about $8,000 in interest, meaning your monthly payments will go up. It won’t be by much, but you’ll definitely feel the difference.
These numbers all take part in a situation where the borrower repays their student loans on time, every time. They have not missed a payment, and will be debt free in ten years, provided they opted for the standard repayment program. What happens if you can’t be this model student? What happens if you miss one, a few, or way too many payments?
Well, the longer you have that loan, the more money you’re going to have to pay back in the long-run. As you have that loan still open, you’re accruing interest, and the amount gets larger and larger. It’s a snowball effect. The longer you take to pay, the more money it will take, and the bigger your chances of defaulting.
As if administrative garnishments and collection agencies weren’t bad enough, the government now decides on a student loan rate hike. The odds for borrowers just get worse and worse as the years trudge on. What’s next?