For the second year in a row, interest rates for federal student loans are set to edge higher.
This summer, interest rates for federal student loans are set to go up for the second year in a row. Once a year, the interest rates for federal student loans are set by Congress who takes into account the market rate. This interest rate is calculated using the 10-year Treasury note, which recently reached 3.1 percent.
The Department of Education hasn’t officially released the interest rates yet, but since they are based on the Treasury note auction that happens in May, a student loan expert was able to calculate them according to the Chicago Tribune.
Undergraduate students taking out Stafford loans could see their interest rates rise from 4.45 percent to 5.04 percent. It will be the highest that interest rates for undergraduate loans have risen in nine years.
Interest rates could rise from 6 percent to 6.59 percent for graduate students taking out unsubsidized Stafford loans. And parents who take out PLUS loans on behalf of their kids could see those rates go from 7 percent to 7.59 percent.
The new interest rates will go into effect on July 1 and will affect anyone who takes out an education loan to pay for the upcoming 2018-2019 school year. The predicted rate change applies only to federal loans, not private loans.
However, keep in mind that private lenders adjust their rates according to the market rate, so if a rate hike is expected for federal loans, then it can presumably be expected for private student loans as well. This could be problematic for some struggling borrowers since these loans generally lack the same protections and benefits as federal loans.
As far as current borrowers are concerned, those who took out federal student loans during previous school years will not be affected because federal rates are fixed throughout the life of the loan. However, many current students who need to borrow again for next year will have to deal with the new potential interest rates.
Of course, this news isn’t entirely unexpected; the economy has been growing which means interest rates grow along with it. In 2016, after several years of historically low rates, the Congressional Budget Office estimated that interest rates would begin to rise. The CBO estimated that undergraduate rates would eventually reach 6 percent, graduate rates would reach 7.5 percent, and parent loans would top 8.5 percent. This is still below the federal cap of 8.25, 9.5, and 10.5 percent, respectively.
There are ways to cut back on the amount you borrow to pay for school, including getting scholarships and grants, working part time, getting into a work-study program, or choosing a less expensive school. See this guide for the steps you can take to pay for college.