With so much talk these days about when or if President Biden will globally cancel student debt — and with payments and interest on that debt suspended for more than two years — it’s easy to forget that the federal student loan system remains unchanged. And part of that system is about to come as a shock to many borrowers: interest rates are going up, probably quite a bit.
“We’re going to get some bad news,” says Robert Kelchen, a higher education funding expert at the University of Tennessee at Knoxville.
Interest rates on federal student loans are fixed, like a mortgage. A student who took out a new undergraduate loan for this school year got a good interest rate: 3.73%. And that loan will stay at that rate for the duration of the loan.
The problem, says Kelchen, is that “every year, interest rates are reset to the 10-year Treasury yield, plus an additional amount,” a premium added to help cover government costs.
This means that borrowers who need help next year will have to take out a new loan at a new interest rate. Federal student loan rates change each May, based on the US Treasury Department’s 10-year note auction, which is scheduled for 1 p.m. ET Wednesday, May 11.
And that’s bad news for borrowers because this year, like mortgage rates and pretty much everything else, interest rates on student loans are sure to go up.
Although we don’t know exactly how much they will increase, we can make educated guesses by applying some basic math, set forth in federal law, to the current 10-year Treasury rate3.06% at the time of writing.
For example, the current 3.73% interest rate for undergraduates would increase to 5.1%.
What is the difference between 3.73% and 5.1%? On a loan of $5,500 (the maximum for a dependent first-year undergraduate), a borrower would end up paying $435 more in interest over 10 years.
The change could have an even greater impact for graduate students and parents, who are allowed to take out larger loans, but at higher rates than undergraduate borrowers (not to mention having to pay higher loan fees). also raised in advance, 4.2% versus 1.1%).
Based on the latest 10-year Treasury rate, interest on loans for graduate students is expected to drop from the current 5.28% to around 6.66%, and for parent loans PLUS from 6.28% to around 7 .66%.
These loans are not capped like undergraduate loans and are only limited by the price of a school, which helps explain why the average annual Parent PLUS loan exceeds $14,000. What difference would this potential interest rate hike make on this type of loan?
Over 10 years, a parent would end up paying $1,194 more in interest.
The higher rate for parents, combined with higher allowable debt levels and less generous access to income-tested repayment options, led many families to financial ruin.
For potential borrowers wondering if they could do better in the private loan market, “remember that the Federal Student Loans Program largely provides loans without any sort of credit check. Everyone gets the same terms. It’s sort of no questions asked,” says Jason Delisle, senior policy fellow at the Urban Institute.
And yes, says Delisle, “the rate will be much lower than what you would get in the private market for a similar type of loan – if you could even find something like that.”
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