Report: Many Families Taking a Risk When Paying for College

Variable-Rate Loans a Risk in Rising Interest Rate Environment

June 12, 2018

As another school year approaches, families of college-bound students may find themselves holding a bill for remaining costs after financial aid and scholarships are applied. Turning to variable-rate private student loans is a risky move that one report says a majority of families are taking.

Given the current financial environment, with rising interest rates, families who choose a variable-rate loan to pay for college take a risk with rates based on benchmark indexes that change over time, said Steve McCullough, president and CEO of Iowa Student Loan. A fixed interest rate is locked in for the entire life of the loan and is a less risky option when rates are rising.

According to the report published by LendEDU, The State of Private Student Loans, which collected data on 80,000 private student loan applicants since 2016, 94 percent of private student loan applicants chose a variable interest rate. The average variable rate amongst those who borrowed was 7.81 percent.

State-based nonprofit lenders across the country offer families an alternative. Iowans in need of a private student loan have lower cost, lower risk options offered by the state-based nonprofit, Iowa Student Loan.

Iowa Student Loan offers applicants with a credit score of 739, the average listed for those included in the report, a fixed interest rate of 6.52 percent for loans where repayment is deferred during college, said McCullough. Thats a set rate that is much lower than the variable rates many families appear to be choosing.

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