Get Ready: Student Loan Rates Are on the Rise

Attending college is a privilege, but it’s one that every student has the right to enjoy. Of course, it doesn’t come for free, and depending on the college or university you select, it’s hardly cheap.

If you don’t have the cash in your coffers to pay for higher education, don’t despair. There are a variety of ways to secure the funds you need for schooling. Since many students can’t rely on scholarships or enough help from parents to pay for school, however, student loans are among the most common means of paying for a college education.

According to the office of Federal Student Aid, which administers FAFSA (Free Application for Federal Student Aid), more than 13 million students take advantage of federal funding each year, amounting to over $150 billion in grants, loans, and work-study opportunities to help them pay for tuition and other expenses. While some can get by on grants, parental assistance, and their own income, especially when they save money by living at home during college, millions of students rely on loans to make it to graduation.

Of course, students that take out loans will eventually have to repay them, which is why it’s important to be aware of student loan rates, and the fact that they can change annually. Since students have to reapply for student aid each year, this means your loan rates could go up, as they’re set to do in July of this year.

Student Loan Rates Over the Past Decade

According to the office of Federal Student Aid, the fixed interest rate for Direct Subsidized and Direct Unsubsidized Loans for undergraduates during the most recent school year (the period starting on or after 7/1/16 and before 7/1/17) was 3.76%. However, it wasn’t always this amount. The interest rates for federal student loans were determined each year by Congress (until 2013), and over the past ten years, rates for Direct Subsidized Loans for undergrad students have fluctuated quite a bit:

• 6.8% between 2006 and 2008
• 6.0% between 2008 and 2009
• 5.6% between 2009 and 2010
• 4.5% between 2010 and 2011
• 3.4% between 2011 and 2013
• 3.86% between 2013 and 2014
• 4.66% between 2014 and 2015
• 4.29% between 2015 and 2016

As you can see, there were years in which the student loan rates didn’t change at all, while some years the rates went down. Over the last ten years, the decreases and increases seem to coincide with economic factors such as the Great Recession.

According to a 2014 report released by the Economic Studies department at the Brookings Institute, there were, at the time, 7 million student loan borrowers in default, and that doesn’t even include those behind on payments in general. In addition, student loan debt became the second largest source of household debt following mortgage loans. Still, students continued to borrow, perhaps in the hopes that earning a degree would help them to secure a livable wage, despite economic woes and unemployment during the recession.

The result was what some deemed a student debt crisis, or alternately, a repayment crisis, and this is perhaps why Congress elected to lower fixed rates for some student loans during the recession and why President Obama expanded eligibility for the income-based, Pay As You Earn Program that helps borrowers that are trying to pay, despite financial distress.

Once the economy began to recover, however, student loan rates started to rise, as evidenced by increases in the 2013-14 and 2014-15 academic years. Rates took a slight dip again from 4.66% in the 2014-15 academic year to 4.29% in the 2015-16 school year, and then to 3.76% in the 2016-17 academic year. These fluctuations were based on the yields of 10-year U.S. Treasury Bonds, as they have been since 2013, and they will be moving into the future. This is why we’re going to see a rate hike in the coming year.

Student Loans Moving Forward

Based on the results of the May 10th auction of 10-year Treasury Bonds, interest rates on student loans will increase in the coming academic year, affecting loans taken out on or after July 1, 2017 and before July 1, 2018. Undergraduates taking out federal Direct Loans will see an increase to 4.45%, up just over 2/3 of a percent from last year.

This might not seem like a huge leap, and the upcoming fixed rate is still lower than it was seven of the last ten years, but it could make a big difference over the life of the average student loan repayment plan. The Nerd Wallet Student Loan Calculator shows that a 10-year loan of $20,000 at the 2016-17 interest rate of 3.76% will result in $4,026.02 in interest payments over the life of the loan (assuming regular monthly payments of $200.22). When you bump the rate up to 4.45% for the upcoming academic year, monthly payments go up just six bucks and change (to $206.80), but the cost in interest payments over the course of a 10-year loan swells to $4,815.41, an increase of $789.39.

Even so, students might not be terribly concerned about adding under a thousand dollars to the price tag. However, some students require far more than $20,000 a year in student loans, and if increases continue, each year could tack more onto already-high costs for the privilege of attending college.

What are students to do? There’s nothing you can do to lower federal interest rates, but you can find ways to cut costs, take fewer loans, and eventually, consolidate and refinance student loans.

If you’re lucky enough to get Direct Subsidized Loans, the federal government will pay the interest while you’re enrolled in school (at least half-time) and during a 6-month grace period following graduation (or after leaving school). After that, you will start accruing interest.

However, you always have the option to refinance student loans. As you earn money, pay down debt, and build a strong credit rating, you may find that you’re able to secure better and better rates on private loans. At some point, this could result in attractive refinancing options that lower rates and save you money over the life of your student loans.