Student Loan Interest Rate Hike

Starting July 1, rates on new student loans will go up, according to the formula the US Department of Education uses to set rates on Stafford loans and PLUS loans. Student loan rates, which track the 10-year US Treasury note, will rise by 0.69 percent: undergraduate Stafford loans will go from 3.76 to 4.45 percent; graduate Stafford loans will increase from 5.31 to 6 percent; and PLUS loans, which are also available to parents, will rise from 6.31 to 7 percent, all effective for new loans beginning July 1, 2017, or later. The rates will remain in effect until July 1, 2018.

It’s important to remember that existing federal student loans will not be affected by the new rates; these loans will remain at their current rate for the life of the loan.

All this is the result of the gradual increases in key interest rates currently being pursued by the Federal Reserve Bank. The Fed carefully monitors interest rates in the context of other key economic indicators—inflation, employment growth, consumer prices, and others—in its attempt to keep the overall economy in balance. Due to generally positive signs of consistent growth over the last eighteen months or more, the US central bank has begun cautiously allowing key interest rates to move upward from the near-zero levels it had maintained since the Great Recession of 2008.

So, what does this mean for students and parents? Well, if you are a freshman entering college in the fall, you really have no choice; you are not eligible to borrow from the government until July 1, 2017. Your federal loan will be at the new rate. For students and parents with existing loans, nothing changes unless you take out a new federal loan. And for those with private, non-governmental loans—such as those made by banks and other private lenders—the new rates have no direct bearing. However, because non-governmental loans are not subject to the same rate guarantees and other provisions, rates on private loans may vary over the life of the loan and will usually rise if market conditions indicate higher interest rates. Many private programs also lack the protections afforded to borrowers with federal loans, such as the ability to renegotiate repayment terms or to defer payments in the event of financial difficulty.

With the federal program, entering freshmen can borrow up to $5,500, sophomores can borrow up to $6,500, and upperclassmen can borrow up to $7,500 (all assuming that the students are classified as dependents on their parents’ or guardians’ tax returns; this applies to most students age 24 or younger).

It’s also important to note that even after the rise, student loan interest rates are still low in terms of historical averages. So, if a parent or student needs a little bit of extra assistance to finance that all-important education, federal Stafford or PLUS loans, with their significant built-in protections for borrowers, are still a good value and well worth careful consideration.

Stay Diversified, Stay the Course!