The Department of Education recently announced that interest rates for federal loans are going to be lower for the 2015-16 academic year. If you’re planning on borrowing money to cover your college costs, the lower rates are a positive in more ways than one.
Not only will they make your education debt less expensive, but if you’re still relying on your parents financially, you may be in a better position to cut the purse strings for good. Here’s a look at what the new rates are and how you can make the most of the potential savings if you’re tired of relying on the Bank of Mom and Dad.
Which loans are eligible?
The new guidelines are only good for federal borrowers who take out specific types of loans. The interest rate reduction applies to loans disbursed on or after July 1, 2015 and before July 1, 2016. If you took out loans before then, the old rates are still in effect.
The rates are good for one year only and it’s entirely possible that they could shoot back up or drop even further next July.
Here’s a handy table that breaks down which loans are impacted, what the new rates are and how they compare to the previous rates:
|Loan Type||Borrower Type||Previous Year's Rate||New Rate|
|Direct Subsidized Loans||Undergraduate||4.66%||4.29%|
|Direct Unsubsidized Loans||Undergraduate||4.66%||4.29%|
|Direct Unsubsidized Loans||Graduate or Professional||6.21%||5.84%|
|Direct PLUS Loans||Parent, Graduate or Professional Students||7.21%||6.84%|
Small drops equal big savings
When you’re looking at the interest rates side by side it doesn’t seem like you’re getting a huge discount. After all, the rates are only dropping by 0.37 percent, so how much can you really save right? Even though the reduction is less than a half a percent it can still make a big difference in how much interest you’ll pay over the life of the loan.
Here’s an example to prove my point. According to Edvisors, the average grad leaves school these days with close to $35,000 in loan debt. If you borrowed that amount as an undergrad at a rate of 4.66 percent, you’d pay just under $9,000 in interest over the of the loan, assuming you’re on a 10-year repayment plan.
If you borrowed that same amount each year at a rate of 4.29 percent instead, the total amount of interest paid would come to right around $8,100, for a savings of nearly a grand. If you opt for an Income-Based Repayment plan, the potential interest savings increases to more than $2,300.
Of course, that’s assuming rates stay low and your actual savings depends on how much debt you’ve racked up by the time graduation rolls around. If you’re not borrowing as much, you may only be able to shave a few hundred dollars off the interest versus a few thousand, but every penny still counts, especially when you’re trying to establish your financial independence.
Put your savings to work
Besides looking at the bigger picture, lower student loan rates can have a positive impact on your finances on a month-by-month basis. Let’s go back to the previous example of a $35,000 loan balance. Assuming the higher interest rate and a 10-year standard repayment plan, your payments would come to $366 a month.
If had the same amount of debt at the new lower rate and you opted for an income-dependent plan instead, your payments could go as low as $103 a month. Having that extra cash available in your budget may be just what you need to finally get your own place.
If you’re already living on your own, there are other ways to put the difference in your loan payments to work. First, you need to open an online savings account so you can start growing your emergency fund.
Why an online account and not at a brick-and-mortar bank? Two reasons: lower fees and better interest rates on your savings. If you’re not sure where to look for an account, our savings account questionnaire can help you find the best fit.
Once you’ve got your emergency savings going, you can look at ways to build your long-term savings. If you want to play it safe and get a better rate, a CD is a good choice.
Just make sure you’re comparing the rates at different banks to see which one has the best deal. You also want to look at what your options are as far as retirement goes. Even if you’re still in school, saving a few dollars a month in a Roth IRA can give you a head start on your nest egg.
Refinance to save on private loans
Unfortunately, the rate drop only applies to federal loans, which means you’re out of luck if you’ve got private loan debt. If you’re trying to save money on these kinds of loans, refinancing them with a different lender is the best way to do it.
Not only can you score a lower interest rate, but you’ll also be able to streamline and reduce your monthly payments. Putting some money back into your budget can keep you from having to ask your parents for a bailout.
Are your planning on taking out student loans this year? How do you plan on making your loans more affordable? Tell us about it in the comments.