How does rising national and global interest rates impact student loans and college affordability?
Paul Curley, CFA
Overview. The college affordability gap has been widening due to the rising costs of higher education outpacing the savings rate and ability of families to pay through cash flow. As a result, an increasing number of families have been turning to student loans as a means to fill the cost-savings gap. With this as a backdrop, the situation is projected to get much more trying for families. As noted in a growing number of articles in February and March 2018, interest rates are projected to increase in 2018 and going forward into near future which will increase the cost of filling the college affordability gap through student loans.
National. In the United States, student loan interest rates are set every year on July 1 by Congress based on interest rates in the marketplace. Undergraduate student interest rates on Federal Stafford Loans are based on the 10-year Treasury note plus 2.05%, and were 4.45% from July 1, 2017 to July 1, 2018. Graduate student loan interest rates on Federal Stafford Loans are based on the 10-year Treasury note plus 3.6%, and were 6.0% from July 1, 2017 to July 1, 2018. In addition to the on-going interest rate, there is an origination fee of 1.066% for the 2017-2018 academic year. You can find the historical and current interest rates at the Department of Education website here.
Global. While the focus of the 529 Dash e-newsletter and 529 Insiders website has historically been on the landscape in the United States, college affordability is a global issue. In the United Kingdom for example, Prime Minister Theresa May addressed the topic of college affordability in February 2018 in Derby where student loan interest rates are currently up to 6.1% and are set to rise in line with the global increases in interest rates. This means that even though the maximum tuition fees will be kept the same for a year while the government reviews the issue of college affordability and how they want to address the topic, the total cost will continue to rise in line with rising interest rates. This topic is not expected to dissipate from the headline news in the UK anytime soon, and the tenor is even expected to drive to a boiling point as the outlook for tuition, university funding and student loan debt is at a cross roads along political lines.
Perspective. In turn the issue of college affordability is on the rise, and your fellow advisers are taking note. Based on Strategic Insight’s 529 Adviser Distribution Survey (2017), the percentage of advisers that strongly agree that college savings is part of a holistic financial plan increased from 39% in 2014 to 47% in 2017. Therefore, college financial planning has increased in prioritization from a non-core issue to a solid part of the foundation of holistic financial planning.
Furthermore, there is a business reason to helping your clients in the college financial planning process as well. Based on Strategic Insight’s 529 Adviser Distribution Survey (2017), 68% of advisers report that college financial planning and using 529s help them to retain clients, while 42% report that 529s help them to attract clients. Therefore while the need and demand for college financial planning has increased, you can grow and protect your book of business as well. Have the college financial planning discussion with your client today.