Federal Student Loan Interest Rates Heading Up

A part of President Barack Obama’s 2015 budget proposal could have implications on student debtors working in public service or nonprofit positions.
Interest rates on federal student loan rates are set to increase next school year.

Federal student loan interest rates will jump from 3.86 percent to 4.66 percent in the next academic year for undergraduate students. They’ll increase from 5.41 to 6.21 percent for some graduate loans.

Last summer’s Bipartisan Student Loan Certainty Act tied interest rates to 10-year Treasury note rates—meant to allow the rates to reflect the overall performance of the economy.

The solution was better than the alternative—if Congress hadn’t acted, rates would have skyrocketed. However, this year’s rates are already in spitting distance of interest rates prior to the new system—rates that many borrowers considered too high. As EdCentral.org reports:

Interest rates for undergraduate Stafford loans will be set at 4.66 percent for the 2014-15 academic year--up from 3.86 percent last year. Before last year's rates, students could have two different rates on their loans, depending on whether the loan was a Subsidized Stafford or an Unsubsidized Stafford loan: 3.4 and 6.8 percent, respectively. But because many students have both types of loans, the overall weighted interest rate back in AY 2012-13 is probably close to this year's rates for most students.

Last summer’s bill does cap the possible interest rate at 8.25 percent for undergrads and 9.5 percent for graduate students.

Interest rates are also capped at 10.5 percent on PLUS loans—loans parents and graduate students can take out in addition to what the government offers upfront. Those loans will jump to 7.21 percent in 2014-2015, up from 6.41 percent this year.

U.S. Senator Elizabeth Warren last week introduced legislation that would allow existing borrowers to refinance their student loans along the lines of current interest rates.

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