Undergrads can expect to pay at least 5% on student loans over the next year.
Federal student loan interest rates will increase for the second time in two years on July 1. Rates are set each year in late spring, based on the 10-year Treasury Note Index. Since rates on 10-year T-notes increased, so will interest rates on federal student loans as well. The Department of Education announced the new rates last week. This means that both parents and student borrowers can expect to pay more as they pay off their education debt. Just how much more depends on the types of loans a borrower takes out.
Student loan interest rates for 2018-2019 academic year
This table shows the rates for each type of student loan borrower. Student loan interest rates rose about half a percentage point for everyone this year.
|Borrower||2018-2019 interest rate||Maximum cap|
It’s worth noting that this second consecutive year of increases puts rates that much closer to hitting their caps. When Congress overhauled the way rates are set in 2013, they created maximum rate caps for each type of borrower. However, as you can see from the table, rates still have room to climb before they hit those caps.
The small silver lining is that these rates are not quite as high as the Congressional Budget Office predicted two years ago. The CBO said rates would start to climb this year, and although they started to increase a year early in 2017, they’re still below the CBO’s projections. The CBO’s projected rates were 6% for Undergrads, 7.5% for Grad Students and 8.5% for parents. Still, the fact that these rate increases could have been worse is little comfort to students and parents who need to borrow for school.
Working to keep borrowing costs low
“Higher student loan interest rates mean that parents and students need to put in even more effort to keep borrowing costs low,” says Gary Herman, President of Consolidated Credit. “It’s essential to look for grants and scholarships that can help minimize the out-of-pocket cost of a higher education. And this shouldn’t be a one-time effort before freshman year. You need to look for financial aid to offset borrowing costs every semester.”
“Students also need to do everything possible to keep borrowing costs minimized as they attend school,” Herman continues. “Many students use loans to cover regular expenses like rent and grocery money while they attend school. If you do this, make sure to create a budget so you can avoid running up more student loan debt living beyond your means.”
Know your loans so you know how to repay them fast
Herman also recommends that borrowers need to become familiar with how their loans work.
- Are the loans subsidized or unsubsidized?
- How soon after graduation or leaving school does repayment start?
- Which federal repayment plans or forgiveness programs can you qualify for once repayment begins?
If you have subsidized loans, that’s good news for your borrowing costs. It means that the federal government pays interest charges that accrue while you attend school. If you have unsubsidized loans, it means that interest charges will accrue each month while you attend school. You can either pay off these charges as they accrue or after you graduate. If you take the second option, then just be aware that the debt you need to repay will be higher than what you borrowed.
For most loans to students, the repayment period starts six months after graduation or when the student drops below half-time enrollment. PLUS loans to parents have no grace period, meaning that repayment starts immediately.