Federal Student Loans to Get Pricier

What’s the story?

Student loan interest rates are set to rise for the second year in a row:

• Undergrads can expect to pay 5.04 percent interest on Stafford loans for the 2018-2019 academic year, up from 4.45 last year.
• Graduate students will see the interest rate on new Stafford loans climb from 6 percent to 6.59 percent.
• Parents who take out Plus loans for their children can expect to pay 7.59 percent interest, an increase from the current 7 percent.

When will the new interest rates take effect?

• July 1, 2018.

Who sets rates on federal student loans?

• Want to take a guess? In a Credible poll, most students and families believed the Dept. of Education or Federal Reserve set the interest rates. It’s actually Congress, and tied to a 10-year Treasury yield.
• As the Denver Post explained, “Lawmakers decided several years ago to tie federal student loan rates to the market, rather than setting them.”

Wait—so can rates just rise forever?

• Congress has set a ceiling on interest rates. Interest rates on undergraduate loans are capped at 8.25 percent, graduate loans at 8.25 percent, and parent loans at 10.5 percent.

The interest rate on my student loans can change each year?

"People go back each year and the rate can change," Stephen Dash, CEO at Credible, told CNBC. "People should be particularly aware of that given the rising interest rate environment."

Why the rate hike?

• Mark Kantrowitz, publisher of PrivateStudentLoans.guru, a student lending website, explained to the Denver Post:

“We are in a rising rate environment, with the Federal Reserve increasing the federal funds rate… So [an increase] is not unexpected. Possibly contributing to the increase in 10-year Treasury note rates were fears of a trade war and inflation fears due to the U.S. backing out of the Iran nuclear deal.”

What do you think?

Should Congress set the interest rate on student loans? Should they renegotiate a new ceiling? Are the looming trade wears and inflation fears responsible for the rise in interest rates on student loans? Hit Take Action and tell your reps, then share your thoughts below.

—Josh Herman

(Photo Credit: zimmytws / iStock)