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What to know about rising student loan interest rates

Interest rates on federal student loans are set to rise July 1. Still, experts say, federal loans remain a good deal.

What to expect. First, the rate increase affects only loans disbursed on or after July 1 of this year. Loans taken before then will not be affected.

For new loans, the rate on undergraduate Stafford loans will climb to a fixed 4.66 percent from 3.86 percent.

On Stafford loans for graduate students, the rate will jump to a fixed 6.21 percent from 5.41 percent.

PLUS loans, which either parents or graduate students can borrow, will rise to a fixed 7.21 percent from 6.41 percent.

Rates are fixed for the life of the loan, but the cost of debt in future years could still go higher. In fact, according to projections by the Congressional Budget Office, student loan rates could reach 7.05 percent by 2018.

"People will think fondly of when the rate on a Stafford loan was only 6.8 percent," said Mark Kantrowitz, an expert on college financing and publisher of Edvisors, an online resource about financial aid.

What to do. Steeper interest rates mean students will face higher monthly bills once they're out of school.

Even so, Kantrowitz says, federal loans are still the best option for the growing number of students who need to borrow to pay for college.

For one, interest rates on federal student loans are capped at 8.25 percent to 10.5 percent, depending on the type of loan. Payment options include income-based repayment plans, which cap your monthly bill to an affordable percentage of your income, and the ability to defer payments if, say, you lose your job.

Federal student loans may be cheaper than private loan options.

At Sallie Mae, for example, fixed rates for private student loans range from 5.74 percent to 11.85 percent. To get the lower rate you need an excellent credit rating.

In contrast, most federal student loans do not require a credit check.

What to know about rising student loan interest rates 06/01/14 [Last modified: Sunday, June 1, 2014 8:28pm]
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