Interest rates are rising on federal student loans

05/14/2014 3:53 PM

05/14/2014 3:53 PM

Here’s an early introduction to college life for incoming freshmen: The federal student loans they’re banking on are getting more expensive.

Interest rates for Stafford, Plus and the other main federal education loans for the 2014-2015 school year will be 0.8 percent higher than they were during the current academic year. This applies to loan money disbursed starting July 1.

And more small rate increases may be in store over the next several years, assuming the economy improves and pushes all borrowing costs higher.

Rates on federal student loans are now pegged to changes in the 10-year Treasury note. Based on the results of the May 7 securities auction, which serves as the benchmark, those notes carried a yield of 2.61 percent. That was 0.8 percent higher than the previous rate.

For the federal Stafford loan for undergraduate students — the most popular plan — the rate was bumped to 4.66 percent from 3.86 percent. That’s still relatively low compared with education loans from private lenders, not to mention the federal repayment terms that are more flexible.

Stafford loans for graduate and professional students climbed to 6.21 percent from 5.41 percent. And the rate of Plus loans, which are available to grad students or parents paying for their undergraduate students’ education, increased to 7.21 percent from 6.41 percent.

The 0.8 percent rise translates into an increase in a borrower’s monthly payment of about $4 for every $10,000 in loan principal a year, or about $48 annually, according to Edvisors.com, a financial aid website. Assuming a 10-year repayment plan on a $10,000 loan, a borrower’s total costs will increase by about $480.

While $480 may not seem like much, it makes the cost of college that much more burdensome and the repayment process more challenging for some borrowers.

In the bigger picture, growing student loan debt balances affect the ability of young people to take out a home mortgage, buy cars and save money for a rainy day.

Earlier this week, the Federal Reserve Bank of New York issued a report that highlighted education debt’s drag on the U.S. economy.

In the 27-30 age category, 22.3 percent of those without student debt had mortgages one percentage point higher than those paying back college loans, the report said. It marked the second consecutive year that young people saddled with college debt had retreated from homebuying.

Several factors could be contributing to this movement, including higher student loan debt burdens, lowered expectations for future earnings, limited access to credit and perhaps even cultural shifts about owning a home, the report said. But the failure of young consumers to take out mortgages should be a red flag.

More than $1.1 trillion in education debt — taken out by students and their parents — is outstanding, according to the report.

Sen. Elizabeth Warren of Massachusetts has a bull’s-eye around that statistic. The day before the new student loan rates were announced, the Democratic senator introduced the Bank on Students Emergency Loan Refinancing Act.

The proposed legislation would allow borrowers — particularly those paying 7 percent or higher — to refinance at current rates.

“Exploding student loan debt,” Warren said in a statement, “is crushing young people and dragging down the economy.”

No matter the value of a college education, any loss of optimism is a steep price to pay.

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