If you're a parent, you may have choked on your cornflakes upon reading recent news that college costs climbed 6% in the last year. One year at a private university now costs an average of $22,218.
It's enough to make any already-worried parent break out in a cold sweat, wondering how they'll ever afford to send their budding scholars to the Ivy League. For that reason, many parents rely on a mix of financial aid sources to ensure that their children can earn that important diploma.
Students have been taking on an increasing share of that load. If you're headed to college soon, you might be interested in a bill that recently passed the House of Representatives, aimed at reducing interest rates on some student loans. Here's what you need to know:
Before you get too excited, realize that this bill has only made it part of the way toward becoming law. It has to be passed in the Senate and signed by the President before it can ever take effect.
If it does become law, here's what it would do. Under the current federal student loan program, the interest rate for loans became 6.8% as of June 30 last year. The bill would cut that interest rate for the roughly 5.5 million people who get subsidized student loans, which are issued based on financial need.
Eventually, the loan interest rate would be cut in half. "Eventually" is the key word here -- it would take until 2011 to get to that halfway point. Here's how the rates would be reduced:
- July 2007: 6.12%
- July 2008: 5.44%
- July 2009: 4.76%
- July 2010: 4.08%
- July 2011: 3.4%
At this point, anyone planning to start college beginning in the fall of 2011 may be jumping for joy. However, you should curb your enthusiasm for a minute. That 3.4% rate is only in place between July and December 2011. At the dawn of 2012, the rate reverts back to 6.8%. And if you're in line to get an unsubsidized loan, none of these reductions apply to you.
To compensate for these rate cuts, lawmakers want to cut some payments and increase fees for lenders. Because of that, this bill may be greeted less than enthusiastically by those major lenders, including Sallie Mae (NYSE: SLM), Student Loan (NYSE: STU), and Nelnet (NYSE: NNI). They would have to bear the brunt of the payment cuts and fee hikes.
If you're hoping to minimize the need for college loans, check out some of the other state and federal perks available for parents and students who want to save money for college. You can get the lowdown on all the options at the College Savings Center.
Two different accounts let you save money and avoid paying tax on your investment earnings as long as the money goes for qualified educational expenses. One, the Coverdell Education Savings Account, allows for a maximum $2,000 contribution each year per student. They can also be used to pay for elementary and secondary school, if private or religious school may be in your child's future.
The 529 college savings plan, as the name implies, can only be used for college. However, they tend to be more flexible than Coverdell ESAs, allowing for very high contributions (more than $200,000 in most cases). They typically don't have age or income limitations.
If you're a parent, you'll have to do some homework when choosing a plan. Sharpen your pencils and get out your calculator. If you want to cheat a little bit, you can use our handy chart, laying out the characteristics of each. It won't affect your grade, we promise.
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Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article, and she welcomes your feedback. The Motley Fool has a disclosure policy.
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