You don’t need me to tell you that Direct Grad Plus loans are really expensive. Have you ever wondered why the government sets Direct Grad Plus at interest rates that in some cases are above 8%? How does the balance grow so quickly compared to Stafford loans? The reason is that there’s an arbitrary formula used to set Direct Grad Plus interest charges, which are the highest of any federal student loan type. In addition, Direct Grad Plus loans have origination fees that rival the most aggressive private lenders in the market. Protect your finances and minimize the use of Direct Grad Plus loans wherever possible.
How is the Direct Grad Plus Interest Rate Calculated?
The Bipartisan Student Loan Certainty Act of 2013 changed the calculations for the interest rate on Direct Grad Plus loans. There is now a margin of 4.6% built into the loans on top of the 10 year Treasury rate as of the final auction in May. That formula sets the Direct Grad Plus rate for the next academic year.
What does that mean in English? Treasury bonds are how our government finances the national debt. Our government must borrow constantly to cover costs. The market sets the interest rate for the government’s borrowing costs by buying and selling Treasury securities. The 10 year Treasury note is the most popular benchmark of all of these securities.
To figure out a fair price to charge consumers who want to borrow money, private lenders will often look to the interest rate on the 10 year Treasury note and add interest on top of that reflecting the higher risk of an individual compared to the government. The federal loan program borrows from this practice.
As I mentioned earlier, the Direct Grad Plus margin is 4.6%. The 10 year Treasury interest rate is locked in for the last auction of May for the future academic year. For 2016, that happened on May 11. The 10 year note came in at 1.71%. So to calculate the Direct Grad Plus rate, you add 1.71 and 4.6, which equals 6.31%.
Don’t Forget About Sky High Direct Grad Plus Origination Fees
On top of having the highest interest rate of any federal student loan, Direct Grad Plus loans also have the highest origination fee at 4.276%. Say you borrow $100,000 for dental school. If it’s all financed with Direct Grad Plus loans, that means you’ll owe $4,276 right away. Now add in the year of accrued interest, and you see why graduate school estimates of the cost of attendance are so horribly wrong.
Contrast the origination fee for the Direct Grad Plus loans to Stafford loans, which only have a 1.069% initial charge. Borrowers at expensive schools must take out loans that are far worse for their finances. In fact, Direct Grad Plus loans are almost as bad as load mutual funds, which usually charge 5.75% of the initial investment.
If You Need to Borrow in the Future, Get Ready for Higher Rates
For the 2016-2017 school year, borrowers are catching a big break. The 10 year Treasury auction delivered one of the lowest 10 year yields in the past 50 years at 1.71%. That means Direct Grad Plus loans for the 2016-2017 school year will be historically low.
Get ready for a huge increase in rates for the 2017-2018 school year. The 10 year Treasury is currently at 2.50% as of when I wrote this article. If the Direct Grad Plus rate was calculated today, it would be 7.1%. The last auction in May 2017 will officially set the rate.
The Trump administration has set off a frenzy of selling for fear of higher inflation from tax cuts and massive infrastructure spending. There’s a chance rates move even higher. If that’s the case, get ready for higher borrowing costs all around.
Direct Grad Plus loans are really expensive. Minimize the need for them by attending the cheapest grad program you get accepted to.
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