Fed student loan rates INCREASE for 2014-2015 (!)

[Entadus]

source: https://studentaid.ed.gov/types/loans/subsidized-unsubsidized#interest-rates

What are the current interest rates?

Loan Type

Graduate or Professional

Loans first disbursed on or after 7/1/13 and before 7/1/14 - 5.41%

Loans first disbursed on or after 7/1/14 and before 7/1/15 - 6.21%

The interest rates shown above are fixed rates for the life of the loan.

This is in addition to a 1.073% fee cut from the top!! So around 7.3% total!

Welp, it looks like my fears about a rate hike were justified. Anybody else notice (and disappointed?)

My family is strongly considering using Discover "health professions loan" (variable rate). The terms of the loan require payments while in school (this is possible for me due to family support), but the interest rate is markedly lower (based on 3-Month LIBOR +5.240% (currently 5.490%). There are no fees!

@The White Coat Investor , and to anyone with relevant expertise, what are the pros/cons of using private student loans instead of federal ones? Is there something I'm missing here? Because to me it seems like Discover is offering cheaper money than the Stafford program!

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[Entadus]

@TexasPhysician , I did not see the "financial aid" forum, could you please move this thread there if that would be a better place?

 

[Mad Jack]

The troubles with private loans are manyfold. First off, the interest rate is variable. Interest rates are damn near the lowest they've ever been. You will be very likely to eventually have a rate that is greater than 7.3%, as the Fed is starting to raise rates, with the eventual goal of them stabilizing at 4%. This would give you an effective interest rate of 9.49% down the road. Next up comes loan forgiveness. Your loans cannot be forgiven via the normal means (20 years of PAYE or 25 of IBR). The third issue, for many, is that you must pay interest from day one and there are virtually no opportunities for deferral or forebearance, and late payment penalties on private loans can be extremely steep compared to their federal counterparts. Finally, in the event of disability or death, your spouse or cosigner will be on the hook for those loans. Federal loans are forgiven in the event of disability or death.

 

[Glimmer1991]

The troubles with private loans are manyfold. First off, the interest rate is variable. Interest rates are damn near the lowest they've ever been. You will be very likely to eventually have a rate that is greater than 7.3%, as the Fed is starting to raise rates, with the eventual goal of them stabilizing at 4%. This would give you an effective interest rate of 9.49% down the road. Next up comes loan forgiveness. Your loans cannot be forgiven via the normal means (20 years of PAYE or 25 of IBR). The third issue, for many, is that you must pay interest from day one and there are virtually no opportunities for deferral or forebearance, and late payment penalties on private loans can be extremely steep compared to their federal counterparts. Finally, in the event of disability or death, your spouse or cosigner will be on the hook for those loans. Federal loans are forgiven in the event of disability or death.

Discover has fixed interest rates as low as 5.99% APR.
Zero fees.
Payments can be deferred until 9 months after graduation, but you can elect to pay during school and get a rate reduction.
https://www.discover.com/student-loans/health-professions-loans.html#Repayment-Features

True about the PAYE/IBR, and true about the cosigner having to pay if you die.

But what if you don't need a cosigner, and what if you don't plan on using PAYE/IBR?

After you graduate, could you not still reconsolidate through a bank like DRB?
http://www.drbank.com/student_loan_information.html


I am sort of curious about these Discover loans, since they are a lower interest rate.

 

[circulus vitios]

You need to sit down and work out the numbers with realistic assumptions. I'm coming in with $30k of undergrad debt, a projected $280k medical school debt, and I intend on specializing. The interest rate on federal loans sucks but with PAYE, and even factoring in the 33% tax bomb, I still come out ahead by $200-300k over a traditional 20 year repayment plan.

 

[The White Coat Investor]

I'd be pretty uncomfortable taking out a student loan at a variable rate and one that didn't allow lower IBR/PAYE payments in residency, not even considering the possible loan forgiveness.

I'm not surprised to see loan rates going up next year. Anyone who understood last years' change shouldn't. It was pegged to bond yields that were at historic lows. Imagine what student loans will be if treasuries go back to 6 or 8%?

Now, if a private bank is offering more reasonable terms (lower payments in med school/residency) and a MUCH lower fixed rate, then sure, that's a good option. But I'd want to see something like 2-5% less than the government loans, not a measly 1% lower on a variable rate.

 

[RangerBob]

I'd be pretty uncomfortable taking out a student loan at a variable rate and one that didn't allow lower IBR/PAYE payments in residency, not even considering the possible loan forgiveness.

I'm not surprised to see loan rates going up next year. Anyone who understood last years' change shouldn't. It was pegged to bond yields that were at historic lows. Imagine what student loans will be if treasuries go back to 6 or 8%?

Now, if a private bank is offering more reasonable terms (lower payments in med school/residency) and a MUCH lower fixed rate, then sure, that's a good option. But I'd want to see something like 2-5% less than the government loans, not a measly 1% lower on a variable rate.

I agree. IBR/PAYE, the option for mandatory residency forbearance (really not necessary for most now that we have IBR...), loan discharge if you die, the possibility of forgiveness, etc., are to me worth far more than a 1.5% interest rate difference.

OP--if you have to get a private loan, get a Wells Fargo MedCap loan--I have one and my grace period is something like 3 or 4 years. It's at something like 4.25%, but in all honesty I'd still take a GradPlus loan at 7.9% any-day over it--there's just so much more flexibility and benefits with the federal loans. However, if you know you're going to be able to pay a loan off within a few years, then I think that's where a variable-rate loan can make a lot of sense. But as a medical student you won't pay anything off, and you likely won't pay much off while you're a resident (I am, but most residents don't seem to want to pay anything towards loan...).

I still remember when one of my private loans from post-bac, cosigned with my dad who had a very good income, was at ~9.5%. It came down to 4% while in medical school. We've paid it off, but it makes me nervous about any variable-rate loans that I can't pay off within a few years--there's a very real chance of those loans going up to around 9%, if not higher.

 

[Entadus]

Thank you to everyone for the info and advice. I've decided to avoid taking out a 5-figure private loan at this time; my family is limiting the Discover loan to $5k with the idea of paying back quickly if the interest rate rises above the Stafford levels. I see this as a band-aid loan; the lack of origination fee is enough incentive to pull it out.

 

[Throwaway!]

I know this discussion is pretty much dead, but I'd like to revive this topic again and chime in on a giant elephant in the room that nobody is seeming to bring up. Maybe @The White Coat Investor can add his input or correct me if I'm wrong on anything about this:

Simply put, fed student loan rates (Stafford and GradPLUS) are going to change every year now and it's highly likely it won't be for the better for us.

As stated before, the interest rates are now tied to the 10 year treasury bond rates, which are estimated to increase every year. So every year, on July 1st, chances are there are going to be a similar thread talking about an increase in interest rates until they reach their hard caps of 8.6% for the Stafford and 9.6% for the GradPLUS loan. WTF!?!?!? But how long will it take to get there? It's actually sooner than you think. Here are the the Congressional Budget Office's projections of what are student loan interest rates are going to look like each year:


Stafford/GradPLUS
2013: 5.41%/6.41%
2014: 6.64%/7.64%
2015: 7.27%/8.27%
2016: 7.83%/8.83%
2017: 8.37%/9.37%
2018: 8.60%/9.60% (capped rate)
2019 onward: all the same (capped rate)

Source: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44198-2014-04-StudentLoan.pdf
(last page)

Yes, based on these numbers the CBO did overestimate the most recent interest rate hike to 6.2%, but I still think this is a good general guideline to follow. From these numbers, it means that as incoming M1s, by the time we graduate, federal student loan interest rates will be nearly 2% more than the previous fixed interest rate in years past. Obama's Bipartisan Student Loan Certainty Act of 2013 basically decreased interest rates for the first two years only to have them hike up to quickly to even significantly higher levels than the previous 6.8/7.9% (right around the time his term of service ends, too).

So to @The White Coat Investor, we really are possibly looking at the possibility of having private loans 2-4% less than than federal interest rates. At what point do you start to seriously start considering private loans over federal ones?

EDIT: By the way, I just bought your book and received it today. Look forward to reading it before class begins.

 

[The White Coat Investor]

I know this discussion is pretty much dead, but I'd like to revive this topic again and chime in on a giant elephant in the room that nobody is seeming to bring up. Maybe @The White Coat Investor can add his input or correct me if I'm wrong on anything about this:

Simply put, fed student loan rates (Stafford and GradPLUS) are going to change every year now and it's highly likely it won't be for the better for us.

As stated before, the interest rates are now tied to the 10 year treasury bond rates, which are estimated to increase every year. So every year, on July 1st, chances are there are going to be a similar thread talking about an increase in interest rates until they reach their hard caps of 8.6% for the Stafford and 9.6% for the GradPLUS loan. WTF!?!?!? But how long will it take to get there? It's actually sooner than you think. Here are the the Congressional Budget Office's projections of what are student loan interest rates are going to look like each year:


Stafford/GradPLUS
2013: 5.41%/6.41%
2014: 6.64%/7.64%
2015: 7.27%/8.27%
2016: 7.83%/8.83%
2017: 8.37%/9.37%
2018: 8.60%/9.60% (capped rate)
2019 onward: all the same (capped rate)

Source: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44198-2014-04-StudentLoan.pdf
(last page)

Yes, based on these numbers the CBO did overestimate the most recent interest rate hike to 6.2%, but I still think this is a good general guideline to follow. From these numbers, it means that as incoming M1s, by the time we graduate, federal student loan interest rates will be nearly 2% more than the previous fixed interest rate in years past. Obama's Bipartisan Student Loan Certainty Act of 2013 basically decreased interest rates for the first two years only to have them hike up to quickly to even significantly higher levels than the previous 6.8/7.9% (right around the time his term of service ends, too).

So to @The White Coat Investor, we really are possibly looking at the possibility of having private loans 2-4% less than than federal interest rates. At what point do you start to seriously start considering private loans over federal ones?

EDIT: By the way, I just bought your book and received it today. Look forward to reading it before class begins.

#1 I don't think anyone, not even the CBO, can predict future interest rates. I wouldn't be surprised to see rates stay pretty low for quite a while.

#2 The earlier you have to make a decision about PAYE/PSLF forgiveness the harder it is to make the right decision. Taking private loans essentially forces you to make that decision early. It's pretty tough to know as an MSII if you're going to be working for a 501(c)3 after residency. If they'd just get rid of all the forgiveness programs for Federal loans this subject would be a lot easier to write about.

 

[psychmdhopeful]

#1 I don't think anyone, not even the CBO, can predict future interest rates. I wouldn't be surprised to see rates stay pretty low for quite a while.

@The White Coat Investor, I know it's hard to predict such things but can you expand you why you think the rates might stay low?

 

[pauven]

I graduated medical school in 2012 with an average interest rate of 6.55% on my student loans. Even then I thought it was too high so I refinanced and secured 5.15% over 30 years. The main catch is that there is no IBR so I have to pay $800 a month on a resident salary of approx $3000 a month after taxes. This goes to show that the rates are going to keep climbing and if you can secure a rate via refinance I'd recommend to do it.

 

[sazerac]

I graduated medical school in 2012 with an average interest rate of 6.55% on my student loans. Even then I thought it was too high so I refinanced and secured 5.15% over 30 years. The main catch is that there is no IBR so I have to pay $800 a month on a resident salary of approx $3000 a month after taxes. This goes to show that the rates are going to keep climbing and if you can secure a rate via refinance I'd recommend to do it.

Ouch! If you had stuck to federal loans, you'd be paying $450 a month right now, tops.

 

[The White Coat Investor]

@The White Coat Investor, I know it's hard to predict such things but can you expand you why you think the rates might stay low?

They might stay low. They might go up. They might go lower. Who knows? The point is they MIGHT stay low. Don't assume interest rates must rise because some talking head says so. They've been saying that for 6 years now and those who acted on that prediction have been wrong, wrong, wrong, wrong, wrong, wrong. Will they be wrong again next year? I have no idea.