June 19, 2018

Fixed Rate Private Student Loans

“Wells Fargo and US Bank have announced that they will offer fixed rate student loans in addition to the variable rate which is currently the norm.

Fixed Rate Private Student Loans

This has been met with different reactions. On one hand, people who want the stability of a fixed rate loan now have that, and those who are prepared to take a chance that interest rates won’t rise can go that route, and this has been received positively by some. On the other, there is still the argument that these kind of loans shouldn’t even be necessary, if the federal government was prepared to offer more than the current $31,000 it currently offers to undergraduates.

Until recently, federal loans were available from a bank at a variable rate. They are now fixed with a rate as low as 3.4%, borrowed directly from the government. Unfortunately, these loans fall short of what it actually costs to go to school, even taking into account scholarships and grants.

Private student loans are taken out to make up the difference, but by the time a student has reached their bachelor’s degree, their debts can be enormous. The government has a program which offers lower loan payments for those with limited income, and loan forgiveness for those in public service jobs, but the banks do not.

These private ‘student’ loans are not in fact taken out solely by the student. Most teenagers, due to their limited credit history will require a co-signer. This is normally a parent. If the student fails to make timely payments, this can result on a negative reflection on the credit history of both the student and the parent.

The new fixed-rate family loans offered by Wells Fargo and US Bank have a length of 15 years. US Bank’s interest rate is 7.8%, but taking into account upfront fees the rate can rise as high as 8.46%. Wells Fargo charges nothing up front in terms of origination fees, and the rate is as low as 7.29% – lower if you are a current Wells Fargo customer. This depends on your credit rating, and it could rise to as much as 14.21% if you enroll in community college or trade school.

In contrast, the variable rates offered are between 3.39 and 10.22% at US Bank, and 3.4 and 11.74% at Wells Fargo. Why would someone choose the fixed rate, given the fact that interest rates don’t look to be rising any time soon?

Lucille Conley, senior vice president of consumer lending at US Bank said “”We think that students and parents are looking for some kind of certainty in the long run. They’ve seen things happen in the housing market that may cause them more concern that they might have had four or five years ago.”"

These loans appear to be geared towards people who are comfortable knowing that their payment will never change. Even though Well’s Fargo didn’t expect much interest in the fixed-rate loan, quite a few families have taken this option.

It should be noted that when you borrow money for college, stay away from a private loan until you have used the entire $31,000 loan offered by the government. Normally, a student can borrow $5,500 in the first year, $6,500 in the second year, and $7,500 for each additional year until they reach the $31,000. cap.

Zac Bissonnette, who is the author of “”Debt-FreeU”" suggests that people who find themselves reaching the federal loan limit may be getting in over their heads. Conversely, Joseph DePaulo, executive vice president of Sallie May, the largest education lender, thinks it depends on someone’s comfort level, relative to their goals and means when it comes to their future.

Offering a middle ground is Mark Kantrowitz, owner of finaid.org. Consider what your annual salary will be when you graduate, and don’t borrow more than that. Also take into account that you may change your mind about your career a number of times while in college.

This issue could be resolved if the government increased their loan amount above $31,000, but in the meantime, students will have to borrow the money where they can.”

More information:

NYTimes.com

Fixed-Rate Private Student Loans Are Still Risky

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