From the Chicago Tribune today comes a story about what, I agree, is a criminally under-reported change in the administration of federal student loans. The byline reads:
Starting Sunday, grad students to pay interest while in school, undergrads lose 6-month grace period
That’s true but a conversation on Twitter earlier today made clear that this story needs some context/clarification.
When you say “grace period” to many student loan borrowers they think first of their six month payment reprieve. Currently, for six months post graduation or dropping out of school a borrower does not have to make any payments. That is NOT the grace period this article is referring to but it is associated with that. As the story goes on to say:
Starting Sunday, students hoping to earn the graduate degrees that have become mandatory for many white-collar jobs will become responsible for paying the interest on their federal loans while they are in school and immediately after they graduate. That means they’ll have to pay an extra $18 billion out of pocket over the next decade.
Meanwhile, the government will no longer cover the interest on undergraduate loans during the six months after students finish school. That’s expected to cost them more than $2 billion.
For years a grace period on interest accumulation on the loan principal (the amount borrowed) has run concurrently with the six month no payment grace period. It’s just not the kind of thing most of us think about. To be honest, even the most financially privileged students and their parents tend not to pay much attention to all the financial aid blathering about compound interest and principals. But that blathering matters.
Before these changes interest accrual was subsidized (think: paid) by the government on behalf of the student borrower on subsidized student loans. Now, that interest will accrue during the grace period for undergraduates and will be paid by the student. It will now accrue during your payment free six month grace period. The difference on a $40,000 loan over a 15 year term at 6.8% interest is about $2500. It sounds small until you realize many students owe significantly more than $40,000 and that debt-to-income ratios matter a lot when you are attempting to borrow money for a home or a business down the line.
The difference for graduate students is even more steep. As of Sunday the ONLY student loans available to grad students will be unsubsidized loans. Now interest for grad students’ unsubsidized loans will accrue THROUGHOUT THE LIFE OF THE LOAN from the day it is dispersed. That interest, if not paid directly while you are in school living on ramen and leftover faculty meeting snacks, will be added to the principal of your loan. Considering how long some students need to complete a graduate degree (anywhere from 18 months to nine years depending on the field, degree type, and Murphy’s law) the end of subsidized loans could be extremely costly for grad students.
For example, $50,000 in subsidized student loans would run you $69,048 at $575 per month for ten years. The same amount with same terms on an unsubsidized loan will cost you $80,004 at $667 per month for ten years. You know, for all that sweet professoriate cash you’ll have lying around.
Holy moly.
It’s an interesting increase on people who pursue higher education precisely when our economy is supposedly so short on innovators and skilled knowledge workers. But, hey, the SGA ain’t the AARP so, yay, political interests group. Or, something.
Calculate your own differences here.
Read more about these changes here and here.
And, good luck. Or, I hope you hit the lottery. Or, marry well. Or, something. I’m fresh out of advice that doesn’t begin and end with stripper poles. Sorry.