Student loan rates dropping July 1, but will it help?

Founder of Secure Planning Group offers things to know before taking out student loans

PEMBROKE PARK, Fla. – Interest rates on federal loans will decrease by .37 percent starting July 1, potentially saving borrowers hundreds of dollars over the life of their loan.

While this sounds like great news, Richard Ehrlich, founder of Secure Planning Group in Boca Raton, says there is more information borrowers need to take into consideration.

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"A 0.37 percent decrease can add up to big savings," he says.  

However, "the rate is tied to the 10-year treasury auction, which is linked to the strength of the economy," Ehrlich says.

This means the interest rate for federal loans will depend on that year's economic standing.

"More than 40 million Americans are now paying back more than $1.2 trillion in student loans, with an average debt of nearly $30,000 per person," Ehrlich says. "Graduates and young adults report they are unable to get loans to buy a home because of the impact on their credit. Others report living paycheck to paycheck and being unable to save for retirement."

Ehrlich offers four reminders for borrowers to consider when taking out student loans.

Minimize Debt

It is much easier to accumulate debt than it is to pay it off. Before taking out any loans, explore all of possible options -- like living at home, attending community college for a year or two, work-study and scholarships. A calculator can help consumer's get a realistic idea of how much debt one is taking on and how long it'll take to pay off.

Know Your Terms

It seems simple, but a consumer should know all of his or her loans. Loans can get lost in the consolidation process, or one miss a notice if he or she moves after graduation. There is a 15 percent default rate on student loans within the first three years -- a lot of that is a lack of awareness. A consumer's first step should be to search the National Student Loan Data System website.

Don't Default

An author made headlines recently when he admitted he willfully defaulted on his student loans, but this is not a good idea. A consumer can face serious consequences; the government can withhold your wages, tax refund and Social Security benefits. The government offers several repayment plans for borrowers who are struggling to pay off their loans. Call a lender before considering missing payments to work on setting up a plan.

Remember: No Escape

Federal law prohibits student loans from being wiped out in bankruptcy, except in rare circumstances. Other forms of consumer credit, like mortgages, credit card debt and auto loans are easier to wipe away in bankruptcy. The White House is considering opening the door to allow private student loans to be expunged in bankruptcy, but Ehrlich thinks it's not likely.