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The Impact of Interest Rates

What are the true costs of borrowing money? One of the major factors when borrowing money is the interest rate, also known as what the company you are borrowing money from is charging you. The main places college students will experience the impact of interest rates is on student loans and credit cards. Taking caution when making decision regarding these two areas is very important! Decisions we make now can have long-term impacts on our financial situation.

Student Loans

While some students have to borrow large amounts of loans to pay for school and others do not borrow any, the average amount of student loan debt per borrower at Kansas State is $26,216. It is very important to remember, however, that you will not end up only paying the original amount you borrowed in school. The interest rates on your loans will increase the amount you have to pay back over time. Let’s take a look at a few different types of loans and how their interest rates would affect paying back the Kansas State average of $26,216.

Federal Direct Unsubsidized Loan – 2019 Rate: 4.53%

  • If you stay on the Standard repayment plan for these loans, which is consistent payments for 10 years, you would pay a total of $32,604.
  • This is $6,388 in interest over the 10 year life of the loan.

Federal Direct Parent PLUS Loan – 2019 Rate: 7.08%

  • These loans will be registered in your parent’s name. If you stay on the Standard repayment plan for these loans, which is consistent payments for 10 years, you would pay a total of $36,683.
  • This is $10,467 in interest over the 10 year life of the loan

Private Loan – Average Fixed Rate: 9.66%

  • These are loans you could find from a bank, credit union, or private loan servicer. Their interest rates are based on your credit worthiness, while loans from the government are not. If you stay on a 10-year repayment plan for these, you would pay a total of $41,053.
  • This is $14,837 in interest over the 10 year life of the loan.

As you can see, interest rates can make a huge difference when you have to pay back your loans! Before accepting financial aid next semester or next year, be sure to check the interest rate first.

Credit cards

If you think interest rates on student loans are high, you’ll be surprised to hear that credit card interest rates, known as the Annual Percentage Rate, can be more than double what student loan interest rates are. It is not uncommon for college students to have APR of 20-25%. Being conscious of your credit card interest rate is important for two main reasons.

  1. If you pay your balance off in full each month, the interest rate will never affect you. The interest rate is how the credit card companies make money and it will only apply if you still owe money at the end of each month. They give you the option to make a minimum payment, but you should pay off the full balance if you are able to.
  2. If you only make minimum payments, the amount you owe will continue growing at a very quick pace. For example, if you owed $5,000 with a 14% APR on your credit card and only made minimum payments, which were 2% of the balance, it would take you 22 years to pay off that amount. Credit card companies are required to tell you how long it would take to pay off your balance on each statement if you made minimum payments. You can find this on your monthly statement!

With this knowledge, I want to encourage all of you to think cautiously when making decisions about your student loans and credit cards. Interest rates do have a major impact!

Sources: https://www.thebalance.com/how-long-to-pay-off-balance-with-minimum-payments-961120, https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007

Thomas Meek
Peer Counselor II
Powercat Financial
www.k-state.edu/powercatfinancial
powercatfinancial@k-state.edu

About Powercat Financial

Director of PFC

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