There’s a bit of good news for those taking out student loans for the 2019-2020 school year, which begins this fall.  Rates on new student loans will fall about a half of one percent to 4.53 percent on the most popular Stafford undergrad loans.

The rates are set each spring, based on the 10-year Treasury note auction held in May.  The new rate set each year continues for the life of the loan.

The rates on older loans remain unchanged over the life of those loans.  That means those who borrowed last year will continue to pay slightly over 5 percent interest.

The recent overall dip in interest rates can be credited for this half-point decline on new loans that will soon be distributed.  But think again if you believe that’s a great deal.

Consider this:  The U.S. Treasury department borrows to finance our government’s deficit spending.  They regularly sell 10-year Treasury notes (which you can purchase through TreasuryDirect.gov) with rates set in a public auction that is dominated by big institutional buyers.  The current 10-year Treasury note auction allowed the government to borrow at a rate of 2.47 percent.

Read that line again:  The U.S. government borrows at a rate of 2.47 percent – and then turns around and lends money to students at a rate of 4.53 percent!

Does that sound like the government is going all-out to help the next generation of Americans develop into productive citizens?  Forget the calls for free college tuition.  Maybe the government should just stop trying to make a profit on the student loans it guarantees.

The bankers who read this column will quickly point out the “risk” in making loans to students.  But what’s the real risk?  Those federal student loans can’t be erased through bankruptcy, and the government will eventually collect repayments, even if it must resort to taking the money out of  your Social Security check!

Parents who borrow to put their children through college are socked with even higher rates, as are graduate students, including our next generation of physicians.

Rates Recap

Here are the Federal student loan rates for 2019-2020:

• Federal Stafford Undergraduate Loans: 53 percent.  (Subsidized Stafford loans don’t accrue interest while the student is in school at least half time.  Un-subsidized Stafford loans accrue interest from the day the loan is disbursed.
• Federal Stafford Graduate Loans: 6.08 percent
• Federal Parent PLUS Loans: 7.08 percent (plus an additional fee of 4.24 percent)
• Federal Grad PLUS Loans: 7.08 percent (plus an additional loan fee of 4.24 percent)

That’s right.  Parents who go into debt on these loans to help their children pay for college will pay an astounding 7.08 percent interest to the Federal government.    Private loans may carry even higher rates.  And both require good credit to qualify.

Parents who once relied on home equity loans can no longer deduct the interest on those loans if the money is used to pay for college.  The latest “tax reform” closed the door on that helpful practice.  So the full cost of college truly adds up for both students and parents.

Two weeks ago I wrote a column about the challenges of finding your loans and setting up a repayment plan – something all graduates must do within six months of graduation.  (You can find it in my column archives at www.terrysavage.com.)   Now, I urge all parents of high school students to think twice about taking on the burden of student loans.

Before you borrow, use the student loan repayment calculators at www.Finaid.org  or www.SavingforCollege.com to understand the true dimensions of the burden you are taking on.  The calculator will estimate of the size of your monthly loan payments and the annual salary required to manage them without too much financial difficulty.

Alternatives may include attending a less-expensive, local community college and living at home for two years – saving a lot of money now, and in repayment.  It’s not so much the current cost but the long- term burden of repayment that matters most.  And that’s the Savage Truth.