May 29 is known as National 529 Day, putting a spotlight on saving for higher education through tax-advantaged investment plans known as 529s.
You can't ignore another May headline. New federal student loan fixed interest rates were released for the 2022-23 academic year, with a jump from 3.73% to 4.99% for federal undergraduate loans beginning July 1, 2022.
Other increases include from 5.28% to 6.54% for unsubsidized loans to graduate students, and from 6.28% to 7.54% for PLUS loans (for graduate or professional students, and parents of dependent undergraduate students).
The change is tied to the Treasury Department's May auction of 10-year notes (2.943%) (tinyurl.com/2rdn9tb). This figure is used to set federal student loans: 10-year note plus 2.05% (capped at 8.25%) for subsidized and unsubsidized loans to undergraduate students; 10-year note plus 3.60% (9.50% cap) for unsubsidized loans to graduate students; and 10-year note plus 4.60% (10.50% cap) for PLUS loans. See the Congressional Budget Office's Federal Student Loans Programs at tinyurl.com/5cvkzw3e.
How much of a difference can the change in interest rates have? Using the new loan rate of 4.99% and Bankrate's Student Loan Calculator (tinyurl.com/ykh67wrw), an undergraduate student who takes out a $10,000 loan with 10 years to pay it back will incur about $2,722 in interest (assuming regular monthly payments). That's up from $1,996, the "old" rate, which was factored at 3.73%.
Keep in mind that these are the federal student loan rates. Loans from private lenders can be different. The current private student loan interest rates range from 1% to 13%, according to Bankrate.com (tinyurl.com/2p97m33u).
Is borrowing worth the cost?
There is no question that a college degree means the potential for higher earnings -- substantially higher. According to J.P. Morgan Asset Management's 2022 edition of College Planning Essentials (CPE) (tinyurl.com/2s46pbpd), for U.S. workers 18 and older, the average annual earnings are 86% higher for someone with a bachelor's degree than someone who is a high school graduate.
Given that a college degree is valuable, the question for parents and students is, "At what cost?"
If you have a newborn, consider this: The CPE projected the cost of a four-year college education at a public school for a newborn to be more than $235,000. For context, from 1983 to 2021, college tuition increased by 840%; in comparison, medical care rose 446% during that time, and housing 196%.
Carrying student loan debt is part of the cost equation. An estimated 2 in 5 families borrow more than $50,000 for college. No problem, until you consider the effect of student loan debt on other financial decisions: The CPE found that 62% of those with college student loans said the payments affected their ability to save for retirement; 48% said they affected their ability to buy a home.
Advance preparation remains the key, especially if you have younger children. If you are a parent considering a 529 plan or another method to save for college, be sure to do your homework and understand all the details.
For those on the cusp of college, what can be done, especially if student loans are a part of your funding equation? Make sure to take everything into consideration. Continue to apply for grants and scholarships to improve your financial circumstances. Consider if it would be a better value to go to an in-state community college for two years to complete your general courses before heading to a state college. The CPE indicates that you can save 40% on costs by attending two years of community college.
If you would like to read about College Scorecard (collegescorecard.ed.gov), which offers tools to compare the costs and potential benefits of colleges, write to readers@juliejason.com and ask for my April column on the subject.
The point is to use all the resources and wisdom you can to create the best college experience at the best price, so that your return on investment is worthwhile when all the costs and benefits are considered.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION