How the federal student-loan deal affects MN grad students and parents

Save now, pay more later? (kenteegardin via Flickr)

The discussion over Congress’ move to put federal student loans on a variable market-based interest rate has so far focused on undergraduates and their Stafford loans.

But what about graduate and professional students, and parents who take out PLUS Loans?

I spoke again with Tricia Grimes, policy analyst for the Minnesota Office of Higher Education.

Here’s how it looks to her:

Graduate and professional students

It appears graduate students — as well as those in areas such as law and medicine — won’t see quite as much interest rate relief as undergrads under the compromise. Undergraduate education appears to be the priority for lawmakers, Grimes said. They know the ropes and need less help than undergrads do.

(Conventional wisdom I’ve heard holds that policymakers figure grad students have already had their shot at an undergraduate education, so they channel resources toward those who haven’t earned their degrees yet.)

Still, graduate students will likely pay less on federal loans they take out this year.

They’ve been paying 6.8 percent interest all along, unlike undergraduates, who saw their interest rate double from 3.4 percent to 6.8 percent July 1. Undergrads had been fighting to get their rates back to the original amount.

So this year’s proposed market-based rate of 5.4 percent — which is based on a 10-year Treasury Bill plus a small margin — appears to be an immediate win, at least in the short term.

Grimes’ calculations show that rate would result in a total interest payment of $8,900 — about $2,500 less than under the current rate.

(Grimes assumes a 10-year, $30,000 loan. Although a loan’s rate is fixed for the life of that loan, students tend to take out multiple loans over the years — each with a different interest rate. So the overall cost will likely vary.)

The market could eventually push that rate to a maximum of 9.5 percent, which would cost grad students an additional $5,200 or so compared to the current rate.

She told me:

“The risk is there that they will have to pay more as time goes on. But again, they will only have to pay more if the economy is doing better. And if the economy is doing better, there should be higher wages.”

Minnesota has about 115,000 grad students, and national borrowing statistics indicate just over half take out loans.

Federal PLUS Loans

These are usually loans that parents take out for their children’s college education — although grad students also have access to their own version of these.

They, too, will likely be less expensive this year.

Grimes says PLUS Loans had been fixed at 7.9 percent. A 10-year, 30,000 loan under that rate would generate about $13,500 in interest at that rate.

The new 6.4 percent rate, by comparison, would save parents about $2,800.

But again, Grimes warned:

“There also is the risk that the rates they will have in future years will go up if the economy improves.”

A similar loan taken out under the maximum rate of 10.5 percent would cost a total of $18,600 in interest — an increase of about $5,100 over the current rate.

Parents generally take out PLUS Loans when their children have already borrowed the maximum they’re allowed, Grimes said. In the 2010-11 academic year, 16,200 parents took out PLUS loans in Minnesota.

About 485 grad students took out their version of PLUS Loans, so the number of borrowers, Grimes said, is pretty small.

The House is expected to adopt the Senate version before its August recess.