Higher Student Loan Rates Take Effect in July. Here’s What That Means for Borrowers

For the first time since 2014, the interest rates on federal student loans are going up.

For the first time since 2014, the interest rates on federal student loans are going up. Loans disbursed between July 1, 2017 and June 30, 2018 will carry the new rates, which are 0.69 percentage points higher than those of federal loans that have gone out since July 1, 2016. Here are the new rates:

  • Direct subsidized loans for undergraduate borrowers: 4.45%
  • Direct unsubsidized loans for undergraduate borrowers: 4.45%
  • Direct unsubsidized loans for graduate or professional student borrowers: 6%
  • Direct PLUS loans for graduate and professional student borrowers: 7%

Why Did the Interest Rates Change?

Legislation that went into effect in 2013 tied federal student loan interest rates to the 10-year Treasury note. Every year, the undergraduate loan rates are calculated by adding 2.05 percentage points to the high yield of the 10-year note at the last auction prior to June 1. Add 3.6 percentage points to the high yield to determine unsubsidized graduate loan rates, and for PLUS loans, add 4.6 percentage points.

How the Rate Change Affects You

If you’re getting a federal student loan in the next year, these are the rates you’ll pay for the life of the loan. Borrowers with existing federal student loans won’t experience a rate change, unless they have a variable interest rate, which is rare.

While the rates have gone up, they could be much worse: The 2013 legislation caps federal student loan interest rates at 8.25% for undergraduates, 9.5% for unsubsidized graduate loans and 10.5% for PLUS loans. Since the 2008 financial crisis, the benchmark rate has remained historically low, but if it rises, future student loan borrowers will pay. So if you’re going to college in the next few years, or will borrow on behalf of someone who is, keep tabs on the 10-year Treasury yield.

How to Change Your Student Loan Interest Rates

Whether you’re a new borrower or have been repaying student loans for a few years, you should know there are a few options for changing the interest rates on your student loans.

You could apply for a federal Direct consolidation loan, which combines multiple eligible loans into a single loan. The interest rate on that loan is the average weighted interest rate of the loans you consolidated, rounded up to the nearest 1/8th of 1%. Whether this strategy will save you money on interest depends on the balances and interest rates of the loans you’re consolidating.

Let’s say you have three loans with the following balances and interest rates: $3,500 at 4.66%, $6,500 at 4.29% and $7,500 at 3.76%. The weighted average interest rate of those loans is 4.14%. But if you switch the interest rates on the largest and smallest loan balances, the weighted average would be 4.36%. The math matters when considering consolidation.

You could also refinance your student loans at a lower rate with a private lender (there’s no federal refinancing option beyond consolidation), but you will lose many of the benefits federal student loans offer, like income-driven repayment plans and student loan forgiveness.

There’s also a simpler way to cut your student loan rates: Set up automatic payments. The savings may not be as significant as they can be with consolidation or refinancing, but most student loan servicers offer a rate discount to borrowers who enroll in auto-debit. If you’re looking for other ways to make your loan payments more affordable, here’s a list of your options.

It’s crucial you stay on top of your student loans, as missing payments can trash your credit and result in significant financial obstacles. You can see how your student loans and other accounts affect your credit by reviewing your free credit report summary on Credit.com.

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