You might remember all the hubbub last summer about student loan interest rates – they were set to double and everyone pushed on Congress to find a permanent fix. Legislation passed that tied the rates to the 10 year Treasury note yield. In its first year, this left rates at a tolerable 3.86% for undergraduate loans, 5.41% for graduate level loans and 6.41% for PLUS loans. But as many experts said at the time, this was a short-term fix that would result in much higher rates in the long run and now this is about to come to unfortunate fruition.
This month there will be a Treasury bond auction and the outcome will determine the rates for the next 12 months of borrowing from July 2014 to June 2015. This will impact anyone borrowing in this period from incoming freshmen to rising college seniors, grad students and more. Consumer Financial Protection Bureau (CFPB) anticipates that rates will rise to 5.09% for undergrads, 6.64% for graduate students and 7.64% for PLUS loans. This is a rise of 31% for undergrads, 23% for graduate students and 19% for PLUS loans.
Granted, it’s not the doubling that we all feared would happen last summer, but it’s not good news. And, what’s worse, is that the underlying factor – the T-note yield – is expected to continue to rise. This most recent hike puts borrowers on the path to the doubling of rates we warned about last year. Last year, the threat was a rise from 3.4% to 6.8% but that was evaded with this legislative “fix” that may be worse in the long run than the situation it was trying to remedy.
So what does this mean and who does it impact?
If you’re all done borrowing, you don’t have to worry about this rate hike. Your rates are set when you take out your loans. What you should understand (and what many students that borrow do not) is that each year is another loan – a separate loan – and it can be at a different rate from other years you borrowed. The interest rate in effect when you take out the loan will be the rate you pay for the life of that loan unless you refinance.
Even a consolidation doesn’t change your effective interest rate. Because a weighted average is used when consolidating loans, the effective rate you’ll pay remains unchanged. Refinance is the only way to pay a different rate than what the loans was issued at. If you’re still in school and borrowing to finance your education, this rate hike will hit you for any loans you take starting from July this year through June 2015.
It’s important to know that while interest rate is important in the total cost of your debt, what’s an even more important factor is the principal you borrow. The less you borrow, the better off you will be, particularly if interest rates do continue to rise. You should always be aware of the total debt you are in and work to minimize what you have to borrow.
Sign up for Tuition.io’s free student loan tool to track your debt throughout the student loan life cycle, see what your payments will be once you graduate and how much your debt will cost you in the long run. Be sure to read our blog for tips on borrowing less and check out our Student Loan Help center for info and guides on all things student loan-related.