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Student Loan Interest Rates Are Going up Again

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Interest rates on federal student loans will go up for the second year in a row, with borrowers for the 2018-19 school year paying 0.6 percentage points more than last year to take out loans from the Education Department.

  • Direct subsidized loans for undergraduate borrowers: 5.05%
  • Direct unsubsidized loans for undergraduate borrowers: 5.05%
  • Direct unsubsidized loans for graduate or professional student borrowers: 6.60%
  • Direct PLUS loans for parent, graduate and professional student borrowers: 7.60%

Why loan rates are going up

Federal student loan interest rates reset every year. Per legislation signed into law in 2013, the rates are based on the high yield of the 10-year treasury note during the last auction held before June 1. The rates remain in effect for all loans disbursed in a 12-month period between July and June of the following year. On May 9, the 10-year note had a high yield of 2.995%.

Once the auction occurs, the rates are calculated by adding several percentage points to the 10-year treasury note yield, to cover the “administrative costs” of issuing the loans, according to the 2013 legislation that enacted this system. For undergraduate loans, the rate is calculated by adding 2.05 percentage points. For direct unsubsidized graduate loans, add 3.6 percentage points, and for PLUS loans, add 4.6 percentage points.

Interest rates, in general, have been on the rise over the last few years, so the bump in cost of borrowing isn’t a surprise. The good news is that Congress set a cap on student loan interest rates when it came up with the new formula. The bad news is those caps are pretty high, so student loan interest rates are likely to continue rising, as long as we remain in this rising-rate environment.

Interest rates cannot exceed 8.25% for undergraduate borrowers, 9.5% for graduate borrowers with direct unsubsidized loans and 10.5% for PLUS loan borrowers. Even though rates increased significantly this year, they have much more room to grow, which we may see if rates continue along the path they’ve been on recently.

What this rate change means

For the most part, borrowers with existing federal student loans will not see their rates change, as all federal student loans disbursed after July 1, 2006 carry fixed interest rates.

Students and parent borrowers taking out federal education loans between July 1, 2018 and June 30, 2019 will pay the new interest rates listed above. The rates will remain in effect for the life of the loan.

How to lower your student loan interest rates

Student loan borrowers have few options for lowering their interest rates. You could either combine all or most of your federal student loans with a direct consolidation loan once you leave school, but that may or may not save you money (more on that in a minute). You could also refinance your student loans with a private lender, but in exchange for potentially lower interest rates, you give up the benefits exclusive to federal student loans, like income-driven repayment plans and student loan forgiveness. Private lenders may or may not offer loan deferment or forbearance (as federal loans do), which allow you to suspend payments if you go back to school, fulfill military service orders or experience financial hardship, among other qualifying circumstances.

You can preserve those benefits with a direct consolidation loan. Your interest rate on that loan will be the weighted average of the interest rates on the combined loans, rounded up to the nearest one-eighth of one percent. The weighted average is what makes this a tricky decision: If your loans with the highest unpaid balance have the lowest interest rate, you may end up with a lower interest rate when everything’s combined. But if your largest balances have the highest rates, you could actually receive a higher interest rate.

If you’re comfortable refinancing with a private lender, keep in mind you’ll need good credit to qualify for the best rates. You can check out our list of the best student loan refinance offers to get a sense of your potential savings.

How to reduce the amount of interest you pay on student loans

Refinancing and consolidating aren’t the only ways you can reduce how much you fork over to the Education Department. Consider committing to one or both of these strategies:

Pay the interest as you go

Unless you have a direct subsidized undergraduate loan, you will be responsible for paying the interest your loan accrues while you are enrolled in school at least half-time, in your grace period (the time between leaving school and entering repayment) or in deferment. When you enter repayment, that interest will be added to your principal loan balance, meaning you will end up paying interest on that interest. By paying the interest as you accrue it, you can avoid this situation, called interest capitalization.

Of course, many students may not have the means to make such payments while in school, but if you can, you may save yourself a lot of money in the long run. This generally only applies to borrowers of direct unsubsidized loans and graduate PLUS loans, as the Education Department pays the interest on subsidized student loans while the borrower is in school, grace period or deferment, and parent PLUS borrowers generally enter repayment once the loan is disbursed.

Pay more than the minimum

Once you enter repayment, your loan servicer will send you a statement saying how much you owe each month. You can pay more than that, and by making extra payments toward your principal balance, you can reduce the amount of interest you pay over the life of the loan. This is a nice alternative to refinancing your student loans to a shorter term, if you’re worried about taking on a higher, required monthly payment.

Make sure you tell your loan servicer that you’re making an additional payment and you’d like it to apply to your principal balance. Otherwise, the servicer may hold onto the money as a future payment. While that means you may not have to pay the next month, you’re also not saving anything by sending over your money early. It’s a good idea to check our account after making such a payment, to ensure the servicer processed it properly.

This story was updated on July 2, 2018, after the Department of Education updated rates on its student aid website. It was originally published May 9, 2018.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christine DiGangi
Christine DiGangi |

Christine DiGangi is a writer at MagnifyMoney. You can email Christine at [email protected]

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Survey: Americans Fear the Stock Market More Than They Love Retirement

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Gains and losses in the stock market can provoke a wide range of emotional responses, from jumping for joy to falling into a fetal position. But a recent MagnifyMoney survey found 60% of Americans feel anxiety when they think about investing in the market, and that reluctance to embrace investing may be costing them when it comes to retirement savings. Let’s take a look at why Americans dread the stock market and how they can face up to their fears.

Survey says people fear stock market crashes

The biggest reason Americans don’t like the stock market is because they are afraid they’ll lose their money in a market downturn or a crash. Our survey found that almost 61% of Americans hesitate to invest in the stock market because of a potential crash. Not every demographic feels that anxiety equally: Almost 72% of millennials worry about a crash, compared with only 56% of Gen Xers and 55% of baby boomers, despite the fact that the younger millennials have more time to absorb and make up for losses in the market.

Beyond age, gender also plays a role in shaping a person’s investing strategies. Our survey found that 59% of men were willing to accept the risk of losing money in the market if it gave them the possibility of a big windfall, while 58% of women didn’t think the loss of any money was worth investing in the market. Women also worry more about making a mistake with their investment decisions — 63% of women versus 53% of men — and are less likely to have an investment account — 44% of women have accounts versus 60% of men.

According to our survey at MagnifyMoney, more than half of the respondents have an investment account, and most of them (67%) have one thanks to their employer.

Why you need to invest in the stock market

Movies such as The Wolf of Wall Street and The Big Short may give the impression that the stock market is the exclusive playground of the privileged looking to turn their millions into billions. But the modern retirement savings landscape — specifically the shift from companies offering pension plans with guaranteed lifelong income, to employer matches on private investment accounts — makes investing in the stock market a necessity for anyone hoping to retire one day.

“Unless you are a Kardashian or the founder of a tech startup, very few people will be able to save enough money to have a secure financial future without at least some exposure to investments,” said David Rae, a CFP based in Los Angeles.

It’s not a coincidence that Americans who don’t invest in the stock market also lag woefully behind on their retirement savings. Less than half of the country’s women have an investment account, and only 36% of them report feeling on-track with their retirement savings, according to a 2018 study by Prudential. And that sense of falling behind isn’t just a feeling — a separate survey from Student Loan Hero, which like MagnifyMoney, is also owned by LendingTree, found women have saved on average only half as much as men.

Millennials who shun the stock market risk seeing their retirement dreams slip away. A report from the nonprofit National Institute on Retirement Security found that millennials as a whole have “earned about 20% less in wages, are less likely to own a home, and have accumulated about half of the wealth of their parents at the same stage in their lives.” A separate study from MagnifyMoney shows just how far this generation has to go, reporting a median savings of $23,000, instead of the $112,000 many financial experts would recommend.

In short, unless you have a trust fund or a billion-dollar idea, you can’t really afford to ignore the benefits of compound interest granted by investing and just store all of their money away in a deposit account, where inflation will almost certainly eat away most of its purchasing power over time.

How to get over the fear of investing

The thought of investing may cause a sinking feeling in most people’s stomachs, but the following advice should calm your nerves when it comes to putting money to work in the stock market.

Don’t panic when the market does

If your worst fears about the stock market are realized in the form of a recession or crash, one surefire way to make things worse is to dump all your stocks and leave the market. “Sticking to your portfolio, whether times are good or bad, is usually the right choice,” said Rae. “Buying and selling without a plan is a recipe for crappy investment returns.” Fortunately, the MagnifyMoney survey found that almost half (49%) of respondents plan to do nothing if a recession hits.

While it’s good so many people aren’t planning to ghost during a bear market, you could also start thinking of a recession as a chance to snag stocks on the cheap. “A recession is like a big sale on stocks that only comes along every few years,” said Rae. “Look to increase your contributions to your investment accounts, if you can.”

Act your age with your investments

Not only are the young blessed with wrinkle-free skin and all of their hair, but they also have the ability to maximize the return on their investments thanks to the magic of compound interest. Because time is on their side, they can afford to allocate more of their savings in stocks — where risks and rewards are both greater — than in lower-risk, lower-return bond markets, money market accounts, savings accounts or other deposit accounts.

As you get older and wiser, and closer to the big retirement date, you should rethink the makeup of your portfolio, shifting more investments to safer asset classes and away from riskier stocks. This way if the market suffers a downturn, you’re be less exposed to the damage and better able to weather the storm until good times are here again.

Don’t be afraid to ask for help

You may think you need to be rich before you need to hire a financial advisor, but there’s nothing further from the truth. Advisors aren’t free, and even the low-fee ones will charge a commission that ultimately comes from your savings, but the peace of mind and clarity you gain about your investments can be worth the money. One rule of thumb you might consider is to use a robo-advisor if you have less than $100,000 in investable assets, and pony up for a real live human advisor once your investments break six figures.

The time to invest in the market is now

Most Americans don’t like the stock market, but investing is almost a requirement if you want to retire. Fortunately, investing doesn’t have to be so scary and by taking some time to learn the basics, you’ll be well on your way toward celebrating your golden years in financial security.

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,049 Americans, with the sample base proportioned to represent the general population. The survey was fielded May 13-15, 2019. Generations are defined as follows:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby Boomers are ages 54-72

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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