Why Federal Student Loans Don’t Have Lower Interest Rates

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piglet in front of computer screen with faq

Piglet takes a break from this FAQ presentation to help Betsy with some answers.

Helping people understand student loans is our job at SALT™, and few are better at it than Betsy Mayotte—the director of regulatory compliance for American Student Assistance®(our parent company). We told borrowers to “Just Ask” her questions, so check out her answers below (as well as her cat—because if Piglet can’t make student loans better, what can?).

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Interest Rates For Federal And Private Loans

Why are interest rates on graduate loans so high? At the end of 10 years, I will owe $25K in interest. That’s crazy!

Recently, I found out about banks that offer lower-interest rates for graduate students in repayment. If private companies can make a profit with lower interest rates, why can’t the federal government do the same?

There are a couple of differences between the two loan types.

First, the federal loans have little or no credit check or ability-to-pay criteria for eligibility, so their risk is a lot higher. Second, federal loan interest rates are set by Congress in federal law, which doesn’t change every year. So, the rates on the loans you have now were set at a time when those rates were close or less than market rates.

The private lenders set their rates based on market rates and change them often. Yes, the rates are lower now, but they may be variable and who’s to say in a few years they won’t go up higher than your current federal loan rates.

Finally, picking a student loan product isn’t just about the interest rate. Federal student loans offer more options to lower, postpone, forgive, and discharge payments that aren’t available under most private loan programs. While we all hope we’ll never need such “insurance,” it can make a big difference to have these options available.

Please let me know if you have additional questions.

Foreign Schools And Federal Financial Aid

I am a 30-year-old non-student who is considering a study abroad program through direct enrollment into a program. How do I find out what programs would be eligible certificate programs for federal student loans?

There are quite a few foreign schools that participate in the U.S. federal loan programs to assist their U.S. students. You can find out if your school is at www.fafsa.ed.gov or here. You will not be eligible for federal grants or most state aid by attending a foreign school, just the federal Stafford and PLUS loans.

Note that if you are studying at a foreign school you may not receive aid if your program has any distance or online learning component. In that case, the entire program is ineligible for aid so it’s important to be familiar with the entire course load before you sign up. If you want to learn more, check out this article on saltmoney.org about studying at foreign schools with U.S. financial aid.

Please let me know if you have additional questions.

Have a student loan question you need an answer to? Just Ask.

(Note: The questions and answers above are real; however, they have been edited for grammar and clarity, but not by Piglet.)

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  1. Bob May 20, 2014 / 1:28 am

    Actually, those lower private interest rates are FIXED rates, NOT variable interest rates!! Check out SoFi and Darian Rowayton!!

  2. Bob May 20, 2014 / 1:33 am

    Also, I have a Ph.D in engineering, a good job, and a FICO score around 800. Why should I be paying more in interest than a 19 year old undergraduate drop-out? Am I really considered more of a credit risk??

  3. Betsy (for Piglet) May 20, 2014 / 10:08 am

    Not all private loans offer fixed rates – many do not actually – but consumers should absolutely shop around when considering such a product. I’m not sure I understand your second question – have you seen such a thing happen?

  4. Bob May 20, 2014 / 11:00 pm

    Of course I’ve seen such things happen. Federal loans for grad students almost always have much higher interest rates than for undergrads even though grad students generally have better credit histories, better job prospects, and better work ethic than undergraduates. Because of the high interest rates, we have to put everything we’ve got into paying off student loans in five years or less. If interest rates were lower, we could afford to pay the loans off over 10 years and simultaneously replace our 18 year old car and buy a starter home. As it is, I don’t see either of these things happening until we are well into our 40s.

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