It’s Getting More Challenging

We dedicated yesterday’s blog post to defined contribution plans. One of the key discussion points was the fact that participants know that they should be contributing more but most cite the fact that other expenditures (not frivolous spending behavior) are eating up most, if not all, of their income prior to being able to save for retirement. Well, it may be getting more difficult in the near future, as Student Loan interest rates are rising for the second consecutive year.

According to a Kiplinger article, “interest rates for federal student loans have inched up for the second time in as many years. The rate on undergraduate Stafford loans disbursed on July 1, 2018, or later is 5.05%, up from 4.45% last year. On Stafford loans for graduate and professional students, the rate is now 6.6%. And the rate on PLUS loans (which allow you to borrow up to the total cost of education, minus any financial aid) for graduates and parents is now 7.6%.”

The good news is that these rate increases don’t impact current holders of government loans, which account for roughly 90% of all student loans, but they certainly impact those going off to college or graduate school this year.  Furthermore, private loans don’t provide the same guarantees and protections that government loans do, so holders of those loans may in fact see higher rates impact their loan payments.

As we’ve reported before, the growth in student loan debt is certainly impacting economic activity from housing, to family unit creation, and ultimately one’s ability to save for retirement. A significant increase in interest rates could have a profound impact on our younger adults.

 

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