Are you planning to take out student loans soon? Be prepared to pay more for the privilege.
Every year, the federal government sets the annual percentage rates for student loans taken out in the following academic year. The rate is set based on the interest rates for ten-year Treasury notes, plus a fixed margin that varies based on the type of federal loan you're receiving – undergraduate, graduate, or PLUS loans (for parents of students or graduates that have maxed out their graduate loan capability).
Unfortunately for student borrowers, interest rates on ten-year Treasury notes are rising just as the rates are being set for the 2018-2019 academic year. May's rates are nearing the 3% mark, which hasn't been seen since December of 2013.
Rates for undergraduate loans will climb to 5.05% from the current 4.45%. Graduate loans will increase to 6.60% from 6.00%. PLUS loans change to 7.6% from 7%. These changes represent increases of 13.5%, 10%, and 8.6% respectively.
Rate changes will take effect for loans disbursed between July 1, 2018 and June 30, 2019. They don't affect loans taken out in previous years, nor do they affect private student loans. Private loans may be set at any market rate the lender chooses based on risk assessment and creditworthiness of the borrower. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
If you're thinking about borrowing now to avoid the rate hikes, it won't help. Federal student loans that apply to the 2018-2019 school year can't be taken out until after the June 30 deadline. You may take out a private student loan as an alternative, but private student loans typically have higher interest rates than federal loans.
How much extra will you pay in interest over the life of the loan? That depends on what type of loan you take out and the amount you borrow.
Let's assume, you borrowed $10,000 at the new rates for the 2018-2019 academic year. Using a standard repayment plan of ten years, an undergraduate would pay $12,757 over the life of the loan, or $349 more than the total repayment under current rates. Graduates would pay $13,687, or $365 more than with the current rates. PLUS loan borrowers will pay $14,307, or $374 more than with current rates.
Online calculators are available to help you determine the difference in your case. Remember, these calculations change if you end up using income-based repayment programs or other non-standard repayment methods once you enter the repayment stage.
The increased interest burden isn't huge in context, but every little bit makes a difference – especially when you are taking out loans each year you're in school.
Also, keep in mind that ten-year Treasury rates are still low in historical terms. A 3% rate may be high for recent times, but Federal Reserve data shows that from January of 1962 through October of 2008, ten-year Treasury rates were never below 3%. Increases are likely to continue.
According to the G.19 Consumer Credit report from the Federal Reserve, America's total student loan debt has surpassed $1.5 trillion. If you must add to that total after July 1 to reach your educational goals, you'll be paying more in interest than borrowers have over the past two years.
Keep that in mind as you consider your overall budget – and if you are just starting on your collegiate path, review your choices in the context of value. With your degree, how likely are you to get a job that allows you to pay back your student loans – along with the extra interest in next year's loans?