The government will charge families less to borrow money for college this fall as interest rates on federal loans are set to drop to their lowest level in a decade.
Interest rates on federal student loans will be reduced by more than half a percentage point as the result of the Treasury Department’s auction of 10-year notes on Wednesday. The government resets rates on student loans every year based on the spring rate of the note, plus a fixed margin. New rates take effect July 1.
Undergraduate students can expect to pay 3.76 percent in interest on new Stafford loans, instead of the current 4.29 percent. Graduate students will see the interest rate on new Direct loans fall from 5.84 percent to 5.31 percent. And parents who take on federal debt to help their children pursue a bachelor’s degree, master’s degree or a Ph.D can expect to pay 6.31 percent on a PLUS loan, instead of 6.84 percent.
“Cheaper debt clearly aids repayment for students who don’t enroll in any of the income-driven repayment options,” said Carlo Salerno, an education economist and private consultant. “It makes monthly payments lower in relative terms, but it also makes the total cost of the loan — principal plus all interest paid– less too.”
The rates are only good for loans taken out to pay for the 2016-2017 academic year. There is no telling whether they will climb the following year, though families have benefited from historic lows on interest rates. Still, rates could top 6 percent on undergraduate loans, 7.5 percent on graduate loans and 8.5 percent on PLUS loans by 2018, according to one projection from the Congressional Budget Office.
It’s been almost two years since Congress decided to tie federal student loan rates to the market, rather than setting them. At the time, lawmakers clashed over the rate-setting system that many feared would eventually lead to higher rates as the economy improved. If Congress didn’t take action, the rates on undergraduate loans were going to double to 6.8 percent.
Congress put caps in place to prevent rates from skyrocketing. The interest 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.
“While market-based interest rates are a far better solution than the structure they replaced, they still suffer from a key problem,” Salerno said. “Where borrowers enroll, what program they choose and whether they complete [college] all affect the employment and income opportunity they’ll have later on that will determine their ability to pay back those loans.”
Want to read more on paying for college? Check out these stories: