The Federal Student Aid office, the largest provider of college financial aid, announced an interest rate increase of nearly a full percentage point will go into effect in July. That seems surprising when the Federal Reserve has kept interest rates near 0% ever since the onset of the pandemic recession . This week it said it will do so for years to come. So why is it different for student loans?
Insider spoke to student-loan expert Mark Kantrowitz, who has published five bestsellers on the best ways to pay for college and manage student loans. He currently runs privatestudentloans.guru, a free website about borrowing to pay for college, where he actually calculated the new student-loan interest rates before the Federal Student Aid office officially posted them to its website.
He explained that the rate increase has nothing to do with the benchmark interest rate or with the current pause on payments of student loans with no accumulation of interest – something President Joe Biden extended through September after he took office.
Interest rates on student loans reset each July 1 and last for a year, and they’re based on the ten-year Treasury note auction plus a certain margin depending on the type of student loan.
Treasury notes are government securities that help finance government spending, and the yield on May’s note was 1.684%, up from 0.7% the year before. Since the yield increased, the interest rates on student loans did as well, because the rates are tied to Treasury note increases or decreases.
- Direct subsidized and unsubsidized loans for undergraduates: 3.73%, up from 2.75%;
- Direct unsubsidized loans for graduates and professionals: 5.28%, up from 4.3%;
- Direct PLUS loans for parents and graduate or professional students: 6.28%, up from 5.3%.
People typically buy treasuries because they provide a predictable income. But Kantrowitz explained that demand for treasuries is low right now because the economy is starting to recover from the pandemic so there is less need for that steady income, meaning interest rates had to go up to stimulate demand.
So in the grand scheme of things, this interest rate increase on student loans will likely not significantly impact payments, and are actually low compared to previous years
“It’s formulaic,” Kantrowitz said. “When that auction rate goes up, the interest rates go up and when that auction rate goes down, the interest rate goes down.”
However, after July 1, the increased rates will apply to any loans taken out
If a borrower took out loans before July 1, then the new interest rate increase won’t be applied to those loans. Still, borrowers do not need to be making any payments on loans until at least October, and if the payment pause is further extended, as Education Secretary Miguel Cardona recently hinted at, the interest rate once payments restart will depend on when the loans were first taken out.
Kantrowitz said that even if payments do restart in October, if interest rates continued to be kept at zero, it “doesn’t save you all that much money.” A report released on April 5 by Upgraded Points – a travel research group – found that the pause on interest during the pandemic has only saved borrowers on average $2,001.
Meanwhile, Democrats are calling for Biden to cancel $50,000 in student debt per borrower, which Kantrowitz said would immediately impact borrowers with debt loads under $50,000.
“The time is now,” Massachusetts Sen payday loans Sand Springs 24 hours. Elizabeth Warren told Insider last week. “We know what the problem is: student loan debt is holding back tens of millions of people across this country. People who can’t buy homes, people who can’t buy cars, people who can’t start small businesses. We need to cancel that student loan debt, not only for those people individually, but for our whole economy.”