College students will pay more to borrow money from the federal government this fall as student loan interest rates are set to rise for the second year in a row.
Interest rates on federal student loans will climb by more than half a percentage point as a result of the Treasury Department’s auction of 10-year notes Wednesday. The federal government resets rates on student loans every year based on the spring rate of the note, plus a fixed margin. New rates will take effect July 1.
Undergraduate students can expect to pay 5.04 percent in interest on new Stafford loans instead of the current 4.45 percent. Graduate students will see the interest rate on new Direct loans climb from 6 percent to 6.59 percent. And parents who take on federal debt to help their children pursue a degree can expect to pay 7.59 percent instead of 7 percent.
“We are in a rising rate environment, with the Federal Reserve increasing the federal funds rate. … So [an increase] is not unexpected,” said Mark Kantrowitz, publisher of PrivateStudentLoans.guru, a student lending website. “Possibly contributing to the increase in 10-year Treasury note rates were fears of a trade war and inflation fears due to the U.S. backing out of the Iran nuclear deal.”
The new rates are good only for loans taken out to pay for the 2018-2019 academic year. But because many families have to borrow money every year to cover the cost of college, annual increases in interest rates could become costly in the long run.
Until last year, families had benefited from historically low student loan interest rates. The Congressional Budget Office projected two years ago that rates would start to climb by 2018, with undergraduate rates topping 6 percent, graduate loans hovering around 7.5 percent and the rates on parent loans hitting 8.5 percent.
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 parent loans is 10.5 percent. Lawmakers decided several years ago to tie federal student loan rates to the market, rather than setting them.