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.”
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 11/1/2018. Variable interest rates may increase after consummation.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.94% – 12.78%1||Undergraduate, Graduate, and Parents|
|4.06% – 13.06%3||Undergraduate and Graduate|
|4.34% – 12.99%2||Undergraduate and Graduate|
|4.25% – 11.10%*,4||Undergraduate and Graduate|
|5.03% – 11.23%5||Undergraduate and Graduate|
|4.12% – 13.13%6||Undergraduate and Graduate|
|5.62% – 10.01%7||Undergraduate and Graduate|
|3.93% – 9.81%8||Undergraduate, Graduate, and Parents|
|4.26% – 12.13%9||Undergraduate, Graduate, and Parents|