Well, the good news is that the cost of federal student and parent loans will go down for the 2015-2016 school year. The new rates will take effect on July 1, 2015.
As explained by Rick Darvis of the NICCP, “Each year the federal government resets the rates on student loans based on the yield return of the Treasury Department’s spring auction of 10-year treasury notes. The yield at auction was lower than the previous year by .37%. As a result, the college loans will be lowered by an identical amount.Starting July 1, undergraduate students will see their interest rate drop .37%, from 4.66% to 4.29%, on new Stafford loans. In other words, a freshman taking out the maximum loan of $5,500 for the 2015-16 academic year will save about $118 in interest over ten years.
Graduate students will pay an interest rate of 5.84% on new Stafford loans versus the current 6.21%. That means a grad student that borrows $20,000 in the coming the 2015-2016 school year will save about $447 in interest on a 10-year repayment plan.
Parents that use the PLUS loan to borrow for their children will pay 6.84 percent, instead of 7.21 percent. Parents that borrow $20,000 loan during the 2015-2016 school year will save around $558 in interest on a 10-year repayment plan.”
Even though this may seem like a small savings from the year before, I’d be happy with news like this every year.
Now for the bad news. The Department of Education released its new financial needs formula for 2016-2017. The bottom line is that your EFC on the FAFSA will most likely go up for 2016-2017 even if your income and cost of attendance at your kid’s college stays the same from the year before. If you’ve ever attended one of my seminars, you know that your EFC or Expected Family Contribution is based on the parents’ income and assets and the student’s income and assets. Before the parents’ income and assets are actually assessed, an allowance based on age and marital status is subtracted. Well the federal government has just reduced the allowance for parental assets by 85%! A rise in your EFC will lower your financial aid eligibility. The simplified formula for determining financial need is:
COA(cost of attendance) – EFC (expected family contribution) = Financial Need
So you can see that if your EFC goes up, your financial need will go down. Your college financial award is based on your financial need and that award usually is comprised of a combination of loans and gift aid (free money). At a time when college costs have gone up so drastically – and keep going up, how could the federal government lower your financial aid eligibility? It’s unconscionable. Unfortunately, this will continue into the foreseeable future unless the Fed amends the formula. It will mean that you will have to be even more vigilant in getting your financial situation in order and in having a good funding strategy in place.