Students heading to campus this fall will pay more for their education thanks to higher federal student loan rates.
Each year, the government sets a new rate for federal loans disbursed during the following school year. As of July 1, 2018, new rates on federal student debt took effect, impacting undergraduate, graduate, and PLUS Loans.
For the second year in a row, federal student loan interest rates are increasing, this time from 4.45% to 5.05% for undergraduate loans. Also, rates for unsubsidized graduate student loans are increasing from 6.00% to 6.60%, while Parent and Graduate PLUS Loan rates are going up from 7.00% to 7.60%.
“Historically, student loan rates are still fairly low,” said Mark Kantrowitz, a well-known expert on student financial aid. “Over the course of a year, we’re looking at an increase equal to the cost of a pizza.”
How are federal student loan interest rates set?
It’s up to Congress to set federal student loan rates. In 2013, Congress enacted a formula to set rates, preventing the need for new legislation each year.
Rates are based on the high yield of the 10-year Treasury note at the last auction held before June 1 of the applicable 12-month period. A set percentage is added to the high yield, and that becomes the rate for the school year.
Even though student loan rates aren’t expected to have a big impact in the short term, interest rates on federal loans are just one part of the college affordability puzzle.
Rates disbursed on or after July 1, 2018, and before July 1, 2019, can be seen below:
|Federal student loan interest rates, 2018-19 school year|
|Loan type||10-year Treasury
note high yield
|Statutory add-on||Final fixed student loan rate||Last year’s rate|
|Direct Subsidized and Direct Unsubsidized
Loans for undergraduate students
|Direct Unsubsidized Loans for graduate
and professional students
|Direct PLUS Loans for parents and
graduate or professional students
Rates for private student loans are mostly set based on the London Interbank Offered Rate, Kantrowitz said. Those usually reflect the one- or three-month rates, allowing private lenders to react quickly to changes in economic and market conditions.
“Sometimes private loans come with lower rates,” Kantrowitz said. “However, they also don’t come with access to the same protections and programs, like loan forgiveness, offered by federal loans.”
With federal student loans, you don’t have to worry about your credit score or income situation. Private lenders base decisions on more traditional credit terms, so you might not qualify for a private student loan without a cosigner, or be eligible for the best possible rate.
How do student loan rates impact borrowers?
The interest rate you pay on your student loans affects your final education costs. For current students, new loans will have slightly higher payments than current loans, perhaps $2 or $3 a month, said Kantrowitz.
“Of more concern is for students enrolling this fall,” said Kantrowitz. “We’re likely to see continued student loan rate hikes, and as what you pay increases each year, that will have a bigger impact down the road.”
For students starting their college journey, especially if grad school will be involved, the combination of the rising cost of college and increasing interest rates on those higher loan amounts can lead to a much more expensive education.
Are student loan interest rates too high?
One bone of contention in recent years has been whether federal student loan rates are “fair.”
Trying to define “fair,” though, is difficult and depends on your situation, according to Jon Fansmith, director of government relations at the American Council on Education, a coordinating body for U.S. colleges and universities.
“If the program is intended to provide access to higher education, especially for low- and middle-income students, then you can argue that rates are likely too high,” Fansmith said. “Others would argue that, especially for a program that makes loans without collateral to predominantly people with poor or nonexistent credit histories, current interest rates are a relative bargain.”
Ashley Harrington, special assistant to the president at the Center for Responsible Lending, a nonprofit aimed at fighting predatory lending practices, wants the government to change the way it sets federal student loan interest rates.
“The caps on loan interest rates should probably be lowered,” said Harrington. “Additionally, maybe the statutory addition to the Treasury rate doesn’t need to be so high.”
The law sets the student loan rate caps at:
- Undergraduate loans (unsubsidized and subsidized): 8.25%
- Graduate and professional loans: 9.50%
- PLUS Loans (parents and graduate students): 10.50%
“While rates right now aren’t likely to cause as much grief, the trend is for higher rates,” said Harrington. “If rates actually reach the caps, it could be devastating later.”
The higher rate on graduate and Parent PLUS Loans is also problematic, said Harrington.
“These loans are particularly used by low-income borrowers and parents of color,” she said. “And it’s very difficult to manage these loans in terms of income-driven repayment and forgiveness, leading to financial problems.”
How to reduce your need for student loans
The best way to avoid paying the costs associated with rising student loan rates is to limit your need for student loans in the first place, said Kantrowitz.
“Whenever possible, start saving as early as you can for school,” Kantrowitz suggested. “The more you have saved up, the less you need to borrow.”
Apply for scholarships and grants, as well as fill out the Free Application for Federal Student Aid (FAFSA). You need the FAFSA to qualify for federal student loans, but it’s also used to determine your eligibility for work-study programs. Some schools use the information for need-based institutional aid.
Harrington also suggested being a savvy borrower.
“Just because your aid letter offers a certain amount, it doesn’t mean you have to take it all,” she said. “Know how much you actually need, consider getting a part-time job, and then borrow as little as you can get away with.”
Advocate for student borrower protections
Once you’re done with school and start repayment, you can’t get lower rates without refinancing your federal loans to private loans — and losing access to income-driven repayment and federal loan forgiveness options.
But there are things you can do to change the way policymakers handle higher education. First, there are proposals for the government to provide federal refinancing options.
Those might be prohibitively expensive, said Fansmith. Instead, he suggested that other solutions might be a better fit, including “reducing borrowing amounts upfront, either through increasing available grant aid or offering better terms on loans initially.”
Harrington suggested that borrowers and other affected parties get involved to push for solutions to the looming student loan crisis.
“Speak to your representatives at the state and federal level,” Harrington said. “Let them know you support reform, and that you vote. If we speak out for student loan reform, we can expand access and reduce costs.”
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(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
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5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens One is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensone.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
Citizens One Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens One reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens One Student Loans private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens One Student Loans-participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
|2.75% – 10.65%*,1||Undergraduate and Graduate|
|2.84% – 10.97%2||Undergraduate, Graduate, and Parents|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|3.14% – 11.88%5||Undergraduate and Graduate|
|2.72% – 10.98%6||Undergraduate and Graduate|