Interest rates on federal student loans are set to rise—again—this July 1, following a nearly half a percentage point bump on Staffords last year.
But before you cue the outrage, consider this: The hike isn't likely to increase students' or parents' borrowing costs in any drastic way, at least not in the short term. Here’s everything you need to know about the upcoming rate jump.
Interest rates on undergraduate Stafford loans taken out after July 1 will climb to 4.66% from last year’s 3.86%. That goes for both subsidized and unsubsidized loans.
Loans for graduate students and parents of college students had higher interest rates to begin with, and will rise too. Unsubsidized Stafford loans for graduate students will now cost 6.21%, up from last year’s 5.41%. And rates on direct PLUS loans, offered both to parents of college students and to graduate students, will rise to 7.21% from 6.41%.
Keep in mind, none of these rate increases apply to loans disbursed in previous years.
Why it's happening
The story starts last summer, when Congress came up against a major dilemma over student loan rates.
Under existing legislation, rates on undergraduate Stafford loans were set to double in 2013, from 3.4% to 6.8%. To prevent that from happening, Congress—after some partisan squabbling—passed legislation pegging federal student loan rates to yields on 10-year Treasury notes, with direct loan rates resetting every year on July 1.
That’s the system we’re on now; so if you’re unhappy about the increase in interest rates, you have bond yields to blame.
Why you shouldn't panic—yet
The size of your loan ultimately will determine how much the new rate hike affects you. But experts say that it’s unlikely to have a meaningful impact on most borrowers.
Consider two different undergraduate Stafford loans of $5,500, the max a dependent freshman can take out. One was taken out last year at the 3.86% interest rate and another taken out this year at the higher 4.66%. In a 10-year repayment period, you’ll only pay about $3 more per month on the loan taken out this year.
So, does it make a difference? Sure, but probably not enough of a difference to stop a student from borrowing to attend school.
“[Government] tinkering with interest rates does not affect who enrolls in college or who graduates college,” says Mark Kantrowitz, senior vice president of Edvisors, an organization that helps students and families plan how to pay for college.
So no, you don’t need to freak out about the interest rate increase this year. But before you get too comfortable, bear in mind that it’s very likely rates will rise in the future, and perhaps even over the four or so years that you or your child is in school. “Given that we’re in a period of very low interest rates right now, there’s nowhere for rates to go but up,” says Kantrowitz. The Congressional Budget Office predicts that rates on Stafford loans will be at 7.7% by 2018.
Fortunately, rates can't rise infinitely: Congress agreed last year to cap undergraduate Stafford loans at 8.25%, graduate Stafford loans at 9.5%, and PLUS loans at 10.5%.