Interest Rates Expected to Spike on Student Loans

Sorry, students, the cost of borrowing for college is going up. Federal student loan interest rates are expected to jump – by an entire percentage point or more.

The government began to peg new student loan interest rates to a type of bond that the Treasury Department sells, called the 10-year note. So the student loan rate is now based on the borrowing rate of the U.S. government. According to Bloomberg:

Stafford loans, the most widely borrowed, carried an undergraduate rate of 3.86 percent for the 2013-2014 school year. In the past three months, the 10-year yield has traded 0.80 to 1 percentage point higher than a year ago, which means education borrowing costs may rise.

Bloomberg noted that although “interest rates are fixed for the life of an education loan, borrowers take out a separate loan for each school year.” Interest rates for the school year beginning July 1 will be set after the Treasury’s 10-year note auction on May 7. The Consumer Financial Protection Bureau warned students about the potential rate hike and its consequences for borrowers last month.

Graduate students borrowed an average of approximately $18,600 in PLUS Loans per year, according to the National Center for Education Statistics. With interest rates set to go up, many graduate students who borrow after July will pay an additional $1,400 over 10 years of repayment for each year they are in school, compared to this year’s rate.

Increased student loan interest rates equate to higher monthly payments for students when they’re through with school. Check out the CFPB’s interactive Paying for College tool to see what implications the rate hike could have for you.

This sounds like a lose-lose situation, both for borrowers and the U.S. economy. Federal loans reportedly make up most of the $1.2 trillion in outstanding student loan debt in the U.S.

According to The Huffington Post:

Amid an era of falling inflation-adjusted incomes for college graduates and increasing student debt burdens — total student debt has doubled since 2007, according to the Federal Reserve — a group of federal regulators, policymakers and student loan experts worry that the nation’s economy will be restrained for years as monthly student loan payments take an increasing bite out of borrowers’ paychecks.

Researchers have found that student loan borrowers are less likely to start small businesses, save for retirement, take out a home mortgage or buy a car.

Yikes. That doesn’t paint a very bright picture for the future, does it? Being saddled with student loan debt after graduating from college is a challenge. I know this from experience.

What are your thoughts on the expected hike for federal student loans? Share your comments below or on our Facebook page.