Student Loan Interest Rates

Student Loan Interest Rates- Comparison of Borrowing $20,000 and $60,000 With Stafford and PLUS Student Loans

This article will discus federal student loan interest rates and will further do a comparison of what it will take to borrow $20,000 and $60,000 with Stafford and PLUS student loans. $20,000 is the average loan taken out by student borrowers these days, and with tuition costs continuing to rise, this figure is bound to increase in coming years. About 70% of

students who leave college do so with student loan debt. This analysis was done using a loan calculator from finaid.org, and this type of scrutiny should be used by all students and their parents BEFORE signing papers for student loans.

Federal Student Loan Interest Rates

As this is being written in early 2010, the student loan interest rates on federal loans are as follows: Stafford- 6.8%; Parent PLUS loans- 8.5%; Perkins loans (for low-income student families)- 5%. A word about private student loans- you can expect student loan interest rates to be higher than these. In addition, many of the consumer protections that come with federal student loans, such as the right to deferment, forbearance, or loan consolidation, simply do not exist for private loans. It is a good idea to stay away from private loans. If you feel you absolutely need to get private loans on top of your federal loans, it would be a good idea to think about attending a less expensive school. These loans can get a person into huge amounts of financial trouble.

Stafford Loan Analysis of Borrowing $20,000 and $60,000

If a student were to borrow $20,000 total at 6.8%, and attempt to pay off the balance during the recommended 10 year period, he or she will have to make 120 payments of about $230 per month, and total interest paid on this loan would amount to $7619. To support this without being overextended financially, the person will need to have a salary of at least $27,619, according to the loan calculator. Even if the loan payments are extended to 20 years, the payments would only decrease by $77 per month to $153 per month. Doing this will add another $9021 of interest to the loan, making the total interest payments required equal $16,640, which is not far from the total amount borrowed. By contrast, if the person were to borrow $60,000 things change dramatically. This is not out of the question by the way, especially if the person decides to continue on to graduate school. The average person leaving graduate school these days has a student debt loan burden of $42,000. With student loan interest rates of 6.8% and a 10 year payoff period, the borrower would have payments of $690 per month and would need a salary of $82,858 to support this kind of student loan debt. The total amount of interest paid during this time would be $22,858. Keep in mind that there are not many $83k starting salaries out there. If the loan payments were extended out to 30 years the monthly payments would go down by $299 to $391 per month, which is still a hefty amount. Doing so would increase the total amount of interest due by another $57,960 for a total of $80,818, well above the amount borrowed in the first place.

PLUS Loan Analysis of Borrowing $20,000 and $60,000

Again, student loan interest rates on PLUS loans at currently 8.5% and will probably remain there for some time. If a student and his or her parents were to borrow $20,000 using PLUS federal loans, payments would be $248 per month for 10 years, and the total interest paid would be $9757. The finaid.org calculator estimates that a salary of $29,756 would be needed to support this loan. Stretching the payments out to 20 years would lower the monthly payments by $74, taking the payment amount $174 per month. Of course this would add substantial interest to the loan, and that amount is $11,897, making the total interest payments over 20 years $21,654, or more than the original amount borrowed. Borrowing $60,000 at 8.5% interest will create monthly payments of $744 per month for 10 years, with a total interest amount paid of $29,270 over that period. The calculator figures that a salary of $89,269 per year will be required to support this amount of student loan debt. If the loan payout is stretched out to 30 years, monthly payments would drop by $283 per month to $461 per month, and this would add another $76,816 worth of interest, making the total interest payments come to $106,086, which approaches double the amount borrowed.

Again, private loans with higher student loan interest rates would only increase these figures. Students and parents should only borrow in total what the borrowers expected starting salary will be- that is the rule of thumb to follow. If you need more than that, look for ways to cut college costs. And be sure to find a student loan calculator and do your own analysis like the one above.