Within the incoming students' Anderson Facebook group as well as in the Google group, there is a raging debate about the current state of student loans. And in light of the recent bill that was signed into law just earlier this week, it's safe to assume that in some way or another, all of us will be affected.
A vast majority of incoming students received notificaton of our financial aid awards for the upcoming school year last week. Most received a combination of grants, subsidized loans, unsubsidized loans, and Grad Plus loans. This mixture of loans amounts to our total cost of tuition + room & board + extraneous expenses. However, pinching us students right now (besides the doom & gloom of the stock market) are the lending interest rates and the sheer discrepency between the lending rates and the savings rates. Take a look at this breakdown:
- Rate for subsidized loans: 6.8% fixed.
- Rate for unsubsidized loans: also 6.8% fixed, but unlike the subsidized loan, the unsubsidized loan will start accruing interest as soon as it's disbursed.
- Rate for Grad Plus loans: 7.9% fixed. Interest starts to accrue immediately after disbursement.
- Rate for money market and savings accounts, national average according to Bank Rate: 0.16% APY, as of 8/3/2011.
- Rate for 1-year CDs, national average according to Bank Rate: 0.44% APY, as of 8/3/2011.
Sure, we can always open a CD account with a "teaser" rate and keep rolling over our funds as they mature from bank to bank, but who has the time & patience to be able to do that? And for what--1% difference, at most? There are also a number of private student loans floating out there (get the pun? Because they have floating rates. OK, that was lame, sorry), but apparently there is quite a bit to read and digest in the fine print and it's always a risky move, especially given the possibility of a US debt-rating downgrade, which in turn may lead to a rise in short-term interest rates (though, to be clear, Moody's already stated that the downgrade will not happen in the near-future, S&P has been keeping quiet and S&P has just now downgraded US debt to AA+).
So to wrap this spiel up: If you have cash saved up that's--most likely--earning next to nothing (and is not earmarked for anything in particular, such as a possible down payment or emergency funds), then it may be a better idea to bite the bullet and just pay up for tuition in cold, hard cash. Of course, that is after you've accepted your grants & subsidized loans!
With that, I'll leave you with a recent article written by the venerable Mr. Frugal himself, Clark Howard:
Obligatory yet Important Disclaimer: Please note that I am only providing my own opinions on this matter and my opinions do not reflect the views of UCLA nor any of its affiliates. This is not to be taken as real financial advice as everyone's needs & situations are different!
