Pictured above is the Federal Reserve Bank of California
After a Treasury auction from last week, student loan borrowers can expect an increase in federal loan interest rates which could result in hundreds of additional dollars in interest over the life of the loan.
There has been plenty of warning that interest rates would rise for the economy overall. The Federal Reserve, citing steady economic growth, raised benchmark short-term interest rates twice in the past six months. Since interest rates for federal student loans are reestablished every year based on market conditions, they were slated to rise.
The new student loan rates—4.45 percent for undergraduate student loans (an increase from 3.76 percent), 6 percent for grad students (up from 5.31 percent), and 7 percent for PLUS loans (a boost from 6.31 percent)—take effect on July 1 for those taking out loans for the 2017-18 school year.
It should be noted that the new interest rates apply for the life of federal loans taken out for the coming school year, but the hike does not affect fixed rate loans taken out in previous years.
While these new rates won’t dramatically increase the monthly payments on a loan, the additional interest could drive the average student loan bill up by hundreds of dollars over the life of a loan. For example, a borrower who takes out a loan for $5,500 will pay $220 more in interest with the new interest rate, using on a 10-year repayment plan as a benchmark.
There is also speculation that rates will continue to rise with the expectation of increased government spending alongside reduced taxes under the Trump administration.
The moves by the Department of Education and Federal Reserve follow a period of historically low interest rates. As mentioned by The Student Loan Report, federal student loan interest rates actually dropped for the 2016-2017 academic year. Despite this historical low, the indication that a rate increase was imminent could be seen as early as the end of 2016 when the Fed raised rates slightly for the first time in a while.
Image Copyright © Leo Newball, Jr.