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December 13, 2017

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Hey students: Start planning now. Senate deal means interest rates will go up

Resident undergraduate registration fees

Note: Data is for registration fees only and does not include other mandatory fees or surcharges. Source: Nevada System of Higher Education

Most of the Senate, including most of the skeptics, put aside their principled positions on student loan reform last week to back new interest rates in the name of achieving a bipartisan compromise to keep college affordable.

But Nevada’s college financial aid administrators aren’t so sure lawmakers ought to be congratulating themselves.

“It’s good for the short term,” Renee Davis, director of student affairs for the Nevada System of Higher Education, said. “But in a few years, the interest rate could easily go up — and that’s going to be more money that students will have to pay back after they leave school.”

A quirk in the way new student loan rates are calculated will likely saddle current middle schoolers with a much higher debt burden once they graduate from college — and financial aid advisers are warning would-be students and their parents to prepare for the hidden sticker shock.

“We realize that talking to them now in their senior year is a little too late,” said Tim Wolfe, UNR director of student financial aid and scholarships. “There’s got to be an attitude shift. This isn’t just about financial aid, it’s about life in general…if they go to college, will they be able to pay all their loans off? Or will they be falling into default? You have to look at the whole picture.”

The deal struck in the Senate last week — which is expected to sail through the House of Representatives — would bring student loan interest rates down from the 6.8 percent level they shot to on July 1, to about 3.9 percent.

That’s not bad for current college students and incoming freshmen, who last academic year were borrowing money at 3.4 percent.

But under the new system, interest rates are tied to the 10-year Treasury note, plus 2.05 percent for undergraduate loans, 3.6 percent for graduate loans, and 4.6 percent for PLUS loans, available for parents and graduate students.

The loan rates are capped at 8.25 percent for undergraduate loans, 9.5 percent for graduate loans, and 10.5 percent for PLUS loans — the kind of high rates students haven’t had to pay since the mid-1990s.

But congressional budget experts predict that if the economy recovers, in just a few years, students could be obliged to pay similar rates again — and that’s when problems might start.

“Students will still go to school, but with the economy the way it is, the neediest students are going to struggle,” said Brad Honious, College of Southern Nevada director of financial aid. “Unless we really push this financial literacy, they might borrow without understanding what they’re getting themselves into.”

Shouldering the cost

The tiered system of federal financial aid is complex enough to confuse even the fairly financially literate.

There are scholarships, such as Pell Grants, that are awarded based on need up to $5,645 in 2013-14. Those don’t need to be paid back.

There are also loans — up to $5,500 to $7,500 worth per academic year for dependent students, plus interest that accrues while they study. Poorer students can qualify for $3,500 to $5,500 of that as subsidized interest loans.

And if those accounts don’t cover the cost of college, there’s always some pricier loans mom and dad can take out.

Disbursers of student loans are legally obligated to explain the intricacies of the system to students when they sign up for financial assistance. But it’s only as of a few months ago that Nevada’s colleges began implementing a system to keep students informed of their financial status, before, through and even after college.

“What we discovered is (what we were doing) wasn’t enough. It would help to start earlier and maybe give a more global approach to what financial literacy means,” Davis said. “That’s maybe the best thing that’s come out of the discussion — there’s much more focus on financial literacy and making sure students who borrow are informed borrowers.”

At UNR, financial aid administrators are turning students on to — a website that encourages students to learn the basics of college budgeting long before they have to put down real dollars.

“We’ve talked about financial literacy before, but now students really need to understand how to budget,” Wolfe said. “College is a planned experience — you had to have a mindset that you were going to go, and forecast over the next 4 or 5 years, what do you want to do?”

Planning is even more important as interest rates on loans are projected to rise to near-record levels in four or five years. But factors unique to Nevada also play an important role.

“A lot of parents were going to use their house equity to pay for college. But that blew up when the markets crashed, and their equity disappeared,” Wolfe said. “So now they think they have no choice but to take the PLUS loans.”

Saving for college, Wolfe reminds, is always the best option. But for families without college savings, Wolfe says sometimes careful budgeting can be a better option than taking on extra debt.

On average, a student that graduates from a Nevada university emerges with about $21,000 in debt. That averages out to just over $5,000 per year — or just about half the annual cost of tuition at the state’s flagship colleges.

At 3.9 percent, a student who takes out $5,000 dollars in loans can expect to pay back as much as $1,046 in interest over 10 years, depending on how large a monthly payment that student is willing to make. But if that student’s parent decides to take out a PLUS loan to cover the other half of tuition, the interest on the second $5,000, with the same monthly repayment, is closer to $1,800.

The numbers get more staggering as the interest rate climbs. The Congressional Budget Office estimated that in 2018, rates will have risen to 7.25 percent. In that context, a $5,000 loan could cost a student over $1,900 — and a parent almost $2,800. If rates rise to their set caps, 8.25 percent, the interest on that $5,000 could be $2,358 for a student, and over $3,000 for a parent.

Considering that outlook, Wolfe encourages families to really reexamine what they can afford out of pocket — even if loans seem more convenient.

In Nevada, Davis said, students and their families are often better positioned to manage their debt than peers in other states, because the cost of college is relatively low.

“As far as schools in the West go, we’re a pretty good deal,” Davis said, explaining that cheaper tuition means the higher-interest loans are “not as commonly used.”

But for students of lower means who are wary of climbing interest rates, Davis has a single piece of advice: Scholarships.

“There are lots of resources out there. … You don’t always have to be that 4.0-plus student to get a scholarship,” Davis said. “If you do some preparation in advance you have a better chance of getting different types of aid that you won’t have to pay back.”

More things may change

Not everyone is convinced, however, that the new student rate formula will yield the interest rates that are sparking such concern.

“The CBO has interest rates shooting up, but if you look back at 2013, they predicted interest rates would be around 6 percent. That didn’t happen,” said Sen. Joe Manchin of West Virginia, one of the architects of the compromise. “Anything could happen.”

But regardless of whether the interest rates climb sharply or subtly, Nevada financial aid administrators also see flaws in a system that is pushing more needy students to hunt outside of the federal financing system for affordable options, or shoulder increasingly expensive loans.

“Pell grants don’t pay as much in tuition and fees as they used to,” Wolfe lamented. “If you look at what mom and dad can get in loans, it’s probably twice as much as they can get in Pell grants. … Congress has to do something to balance between grants and loans.”

“Pell grants are not going to pay for child care, transportation, fees and books, or living — even at a community college,” Honious added. “There’s a big push to get people through quicker and take more credit hours — well if you’ve got a family or you’re a single parent, those loans are helpful.”

The problem is, when it comes to federal education planning, there isn’t much room to move.

In the last few days, President Barack Obama has been hinting that he is planning to encourage Congress to take a sweeping new look at higher education, just in time for the reauthorization of the higher education bill next year. But funding financial aid is a challenge with limited resources.

Two summers ago, for example, graduate students lost the option of borrowing subsidized dollars — a move that, in part, allowed the government to keep awarding expanded Pell Grants to the neediest undergraduate students.

Wolfe worries those loans might be targeted next as Congress looks to save costs.

“If they took away the subsidized interest loan for undergrads, that would be a hard pill for an 18 year old kid,” Wolfe said. “That’s when you have kids start to think about, ‘Is college really worth it?’ … We need to put money back into education.”

But while administrators have a clear view of the problems high interest loans may cause future generations of students, they, like Congress, have yet to come up with a perfect solution.

“As much as I advocate for students, I have a hard time ignoring the realities as well,” Davis said. “I don’t know the answer to coming up with more money for education. It’s important, I think it’s crucial to our future, but I don’t know where it’s going to come from.”

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