Students to Pay Lower Interest Rates for New Federal Student Loans
July 6, 2015

Students taking out federal loans to pay for college will pay lower interest rates in the 2015-16 academic year, thanks to changes made by Congress. The new interest rates will apply to loans disbursed July 1, 2015 onward for the upcoming school year. Estimates suggest that millions of college students and their families will benefit from the lower interest rates.

The Revised Interest Rates on Federal Student Loans for the 2015-16 Academic Year

The following table depicts the new interest rates that will apply for student loans disbursed starting July 1. The revised interest rates do not affect another federal subsidized loan, the Perkins loan. Interest rates on Perkins loans continue to remain fixed at 5 percent indefinitely.

Type of Student Loan Existing Interest Rates(2014-15 Academic Year) Revised Interest Rates(2015-16 Academic Year)
Federal Stafford Loans for undergraduates (Subsidized and Unsubsidized) 4.66 percent 4.29 percent
Federal Stafford Loans for graduates (Unsubsidized) 6.21 percent 5.84 percent
Grad PLUS and Parent PLUS loans for parents of undergraduates and graduates 7.21 percent 6.84 percent

In the past, Congress was responsible for prescribing the fixed rates of interest for federal loans. In 2013, Congress decided to amend this method. Since then, Congress fixes the rates for new federal student loans in the spring of each year, basing the new rates of interest on the 10-year US Treasury note auction, and adding a specific premium for each type of loan. This rate remains the same over the life of the student loan.

In another change that came into effect July 1, the authorities have also increased the maximum Pell Grant to $5,775 from the existing $5,730. The federal government awards Pell Grants on a need basis. As a result, recipients of the Pell Grant do not need to repay the amount they receive.

How Beneficial Will the Lower Rates of Interest Be?

A lower rate of interest on a loan means that you’ll be making lower monthly payments. So, students taking out student loans from July 1 onward will pay comparatively less than they would have had to if the interest rates had remained unchanged for the current academic year.

Tim Grant mentions that according to Mark Kantrowitz, senior vice president and publisher of Edvisors, a college financing advice service, the lower rates of interest will translate into lower monthly payments, but not by much.

On doing the math, Kantrowitz estimates that the savings per month would amount to less than $2 each month for a student loan of $10,000 over a 10-year repayment period. So, if you had borrowed this amount for a 10-year repayment term:

  • As a Stafford Loan for undergraduates, you would save $1.78 a month
  • As a Stafford Loan for graduates, you would save $1.86 a month or,
  • As a Parent PLUS loan, you would save $1.91 each month

However, the reduced rates of interest are likely to be applicable only for this academic year. Experts at the Congressional Budget Office forecast an increase in college borrowing costs for the 2016-17 academic year. For instance, the rates on new Stafford loans for graduates could well exceed 6.8 percent from the next academic year – the highest rate in 15 years.

New Interest Rates Do Not Apply to Private Student Loans or Existing Federal Student Loans

Student borrowers with existing federal student loans would do well to note that the new interest rates do not apply to their existing loans. Therefore, if they want to enjoy the benefit of lower interest rates, they would need to consider consolidating their student loans. Loan consolidation refers to a process whereby borrowers can combine multiple loans into a single payment, while averaging their interest rates.

Another option open to these borrowers is to refinance their loans through a private lender. Doing this would earn them a revised interest rate that takes into account the borrower’s current financial health and similar factors.

Similarly, the new interest rates do not apply to private student loans. The interest rates for private student loans tends to fluctuate with the market conditions. As such, private lenders use a different mechanism for calculating their interest rates. Some factors they consider while determining interest rates include:

  • The borrower’s credit history and,
  • The borrower’s ability to repay

Private student loan borrowers have the option of choosing a fixed rate loan that keeps the rate of interest consistent during the repayment period. Alternatively, they could consider a variable interest rate that fluctuates based on prevalent market conditions.