College and grad students borrowing for the upcoming academic year will pay higher interest rates on federal loans than they did this year, a difference that could amount to hundreds of dollars in extra interest over the life of a loan, following a Treasury auction Wednesday.
The interest rate for undergraduate students is 4.45% for the 2017-18 school year, up from 3.76% for the current year. Graduate students can borrow at a rate of 6%, up from 5.31%. And for graduate students and parents who take out PLUS loans, the interest rate will be 7%, up from 6.31%. This year's rates overall are the lowest since the government stopped issuing variable rate student loans.
Federal student loan interest rates have been tied to 10-year Treasury note rates since 2013, when Congress decided rates should reset every year based on market conditions. The interest rate move, set at an auction Wednesday, was expected after the Federal Reserve raised benchmark short-term interest rates twice in the past six months in response to healthy U.S. economic growth.
Expectations that the Trump administration will increase government spending, while simultaneously cutting taxes—potentially widening the budget deficit and pushing future interest rates higher—was also a factor, says Stephen Dash, chief executive and founder of Credible.com, a student loan marketplace.
The new interest rates, which go into effect July 1, apply only to borrowers who take out loans during the upcoming 2017-18 school year. However, those rates are fixed for the life of the loan, meaning borrowers will continue to pay the new, higher rates for years to come. Because new rates are set each year, it is common for undergraduates to have at least four separate loans with four different interest rates upon graduation.
While this year's increase won't drastically change a borrower's monthly payment, the extra interest will add up over time. A student who borrows $5,500 for a year of college would pay $220 more in interest with this year's rate compared to last year's, based on a 10-year repayment timeline.
Still, given last year's rates, borrowers are still getting a pretty good deal. Rates have been as high as 4.66% since the process for setting rates was changed in 2013. A decade ago, before the change, rates were above 6%.
This article has been updated to clarify that interest rates on student loans were lower than 3.76% from 2003-2005, when the government issued variable interest rates on student loans.