Federal student loan interest rates will rise as of July 1. However, because college students who had to take on debt this year have enjoyed some of the lowest borrowing costs in history, rates will still be relatively low. (For more, see 5 Ways the Interest Hike Could Affect You.)
Why Student Loan Interest Rates Will Rise
Rates for federal loans are determined by an annual auction of Treasury notes. Because the yield on those bonds rose lin May, so too will student loan rates for 2017-18.. Between July 1, 2017, and June 30, 2018, recipients of Stafford loans can expect to pay 4.45%, an increase of nearly three-quarters of a percentage point over the current rate of 3.76%. Those who receive graduate Stafford loans will have to pay 6% on their loan balance, up from 5.31%.
Rates are also expected to rise for borrowers who participate in the federal PLUS program, which is available to grad students and parents of undergraduates. Their interest rate will jump from 6.31% to 7%.
Because federal student loans offer fixed rates, the loans of those who have borrowed in previous years won’t be affected by the change. Nor will the changes impact loans from private lenders, which are not subject to the formula the government uses. Private loans generally move in lock step with the London Interbank Offered Rate (LIBOR), a benchmark rate for short-term debt. (For more, see Student Loans: Private Loans.)
Rates Set by Auction
In setting rates for the upcoming academic year, the U.S. Department of Education relies on yields from a May auction of 10-year Treasury notes. It then adds a fixed percentage to that number to determine the interest rate for Stafford and PLUS loans, which are available through its Direct Loan Program.
Lower demand for Treasuries forced yields into higher territory this year, in the process raising student loan rates. Because government loans are fixed, the new rates will apply for the life of the note.
Figure 1. Interest rates on Stafford and PLUS loans are determined by the yield on 10-year Treasury notes and capped by law in order to keep student borrowing costs in check.
Incoming freshman can’t borrow before July 1, so they’ll be forced to accept the higher rates that will kick in over the summer. However, current students who are still eligible have the option of borrowing for the current academic year at today’s more favorable terms.
The rate hike amounts to a few dollars more a month for every $10,000 you borrow, but over the long run those extra costs add up. For example, a student who borrows $20,000 in Stafford loans would shell out nearly $790 more in interest over a 10-year period, according to the FinAid repayment calculator.
Despite the increase, student loans remain relatively attractive by historical standards. For instance, prior to the Great Recession Stafford loan rates were as high as 6.8%. Currently, 32.8 million Americans hold a total of $705 billion in Stafford loans, according to the latest available data from the office of Federal Student Aid. That includes a mix of subsidized loans, which don’t charge interest while the borrower is enrolled at least half-time as a student, and unsubsidized loans. PLUS loans represent a much smaller part of the federal-aid landscape, with grad students holding $52.8 billion in loans and parent-borrowers owning $77.5 billion.
The Bottom Line
Students who borrow as of July 1 can expect to pay higher rates than current borrowers. Still, some perspective is important. Costs have been extremely inexpensive in recent years, thanks to an overall low-interest-rate environment.