| Families have been benefiting from historic lows on student loan interest rates. But that will change this fall.
As the result of the Treasury Department’s auction of 10-year notes on Wednesday, interest rates on federal student loans will rise by seven-tenths of a percentage point. The new rates will take effect July 1 and are only good for loans taken out to pay for the 2017-2018 academic year.
Undergraduate students can expect to pay 4.45 percent in interest on new Stafford loans, instead of the current 3.76 percent. At that current rate, a student borrowing $5,000 would repay a total of $6,007 with interest over the standard 10-year period. But a freshman taking on a $5,000 loan for the 2017-18 academic year will pay $196 more in interest with the new rate, assuming she pays off the loan in 10 years.
Graduate students will see the interest rate on new Direct loans climb from 5.31 percent to 6 percent. A graduate student who took out a direct loan for $20,000 this past school year would have to shell out a total of $25,821 to pay back the debt in 10 years. The same loan amount will cost an extra $833.
Parents who take on federal debt to help their children pursue a bachelor’s degree can expect to pay 7 percent on a PLUS loan, instead of 6.31 percent. If mom and dad take out a $10,000 PLUS loan at the new rate this coming school year, they would be looking at $13,933 in total repayment costs over 10 years, an increase of $423.
Because many students and their families have to borrow money each year, continued annual increases could take a significant toll. If there are a couple more rate increases over the next several years, a student who graduates with $31,100 in loans at a blended rate of 5.1 percent would pay $49,672 to repay them over 20 years – $5,380 more than the $44,292 in total repayment costs they would be looking at if they’d been able to take all of their loans out at 3.76 percent, said Stephen Dash, CEO of Credible, a marketplace for student loans.
“Students and their families shouldn’t panic about this year’s increase, but they should keep in mind that if interest rates continue to go up while they are in school, that will also have an impact on their monthly payment and total repayment costs after they graduate,” Dash said. “They should be aware that because some colleges front-load their financial aid offers, they may get less financial aid each year they enroll, and have to borrow more when they are seniors than they did when they are freshmen.”
Dash said he expected rates on student loans would rise because of the way the markets reacted to the election of President Donald Trump. Treasury yields soared after the election, as investors banked on increased government borrowing to pay for promised tax cuts, infrastructure and defense spending. This time a year ago, 10-year Treasury yields were at 1.71 percent, but because investors expect a surge in economic growth and are weary of safe investments like bonds, 10-year yields are at 2.4 percent, Dash said.
The new rates track closely with projections from the Congressional Budget Office, which anticipated rates to top 6 percent on undergraduate loans, 7.5 percent on graduate loans and 8.5 percent on PLUS loans by 2018. The government resets interest rates on student loans every year based on the spring rate of the note, plus a fixed margin. Next July’s rates could be higher, but there are protections for families.
To keep rates on education loans from skyrocketing, Congress has set a ceiling. Interest rates on undergraduate loans can never go higher than 8.25 percent. Graduate loans are capped at 9.5 percent, while the limit on PLUS loans is 10.5 percent. Lawmakers decided several years ago to tie federal student loan rates to the market, rather than setting them. If Congress didn’t take action, the rates on undergraduate loans were going to double to 6.8 percent.
“Higher federal student loan rates, and more expensive loans for the 2017-2018 school year aren’t exactly welcomed news, but some things haven’t changed for borrowers as federal student loans are still a better bet than private loans,” said Brianna McGurran of the personal finance website NerdWallet. “Since their interest rates are fixed, they won’t go up in the future, and they also come with crucial protections like income-driven repayment and forgiveness for public-sector workers.”
Students with federal education loan can enroll in income-driven repayment plans that tie their monthly payments to a percentage of their earnings, so students with little money or those who fall on hard times can manage their payments.
