On July 1, the interest rate charged on newly issued federal Direct Subsidized Loans for college (formerly Stafford Loans) increased from 3.4 percent to 6.8 percent. While there is some hope Congress may roll back part of the increase, parents may request your help deciding whether these loans still make sense. This is one reason to add college finance counseling to your repertoire of client services.
The answer is that Direct Subsidized Loans, which are needs-based and directly issued by the Department of Education (DOE), remain a pretty good deal – provided parents and student's plan ahead to create options. DOE pays all interest that accrues on student loans while the student remains in school at least half-time. For most four-year educational programs, this period can last up to six years. The maximum cumulative total of Direct Subsidized Loans a student can take currently is $23,000. (There is a 1 percent origination fee for all loan amounts.) After leaving college, students may qualify for an interest-free deferral period for an approved graduate fellowship program, period of unemployment of up to three years, military service, National Guard or reserve service.
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Here's a planning idea for parents: Take any Direct Subsidized Loans offered and simultaneously set up a designated savings fund that will accumulate to $23,000 over four years. At the end of college years plus any interest deferral period, parents will have the option of:
Keeping the loan and paying its interest rate;
Refinancing the debt into a lower interest rate, if one is available; or
Using the saving fund to pay off the debt.
More information on federal Direct Loan terms is available.
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