Interest rates for federal student loans are about to rise.
Rates for newly issued federal loans will be 0.69 of a percentage point higher starting July 1 than they were for the 2016-2017 school year, Forbes reports. The publication describes this as “a significant increase across the board.”
The increase will affect newly issued loans of the following types:
- Direct subsidized loans for undergraduate students: 4.45 percent interest rate effective July 1, up from 3.76 percent currently
- Direct unsubsidized loans for undergraduate students: 4.45 percent, up from 3.76 percent
- Direct unsubsidized loans for graduate or professional students: 6 percent, up from 5.31 percent
- Direct PLUS loans for parents and graduate or professional students: 7 percent, up from 6.31 percent
Direct subsidized and direct unsubsidized loans are sometimes also referred to as Stafford Loans or Direct Stafford Loans.
How federal student loans work
Loans to new borrowers can change annually, based on the results of the U.S. Department of the Treasury’s auction of 10-year Treasury notes every May, Forbes explains. Once you take out a loan, the rate on that loan remains fixed for life.
Rising interest rates for federal student loans are also part of the ripple effect of the U.S. Federal Reserve System’s recent increases to its benchmark federal funds rate, CBS News notes.
The Federal Reserve, which is the nation’s central bank, has increased its federal funds rate twice in the past year, in December and March. After the most recent rate increase, we explained in “The Fed Hikes Rates Again: 3 Steps You Should Take Now” that these hikes generally make it more expensive to borrow money, whether by credit card or by loan or mortgage.
Reducing student loan costs
Student loans are different than credit cards and other types of loans, though, in that borrowers generally have fewer available tactics for reducing their interest rates. That’s especially true for federal student loans — there’s no arguing with Uncle Sam’s interest rates.
So if you or your child or grandchild is considering a student loan, perhaps the first question should be whether it’s worth it and what alternatives the student has. After all, a 2015 survey found that one-third of Americans regret taking out student loans.
As Money Talks News founder Stacy Johnson recently told a high school student in “Ask Stacy — Should I Borrow $80,000 or Forget Art School?“:
“Consider a community college or other less expensive option for the first two years, then transfer to the university whose name you’d like to see on your degree. This is probably the single biggest way to save on a college education. Not only do you save on tuition costs, attending a community college might also allow you to stay under your parents’ roof and save housing expenses as well.”
Do you have any student loan advice or experience you’d share with students? Let us know below or on Facebook.