Since July, student loan interest rates have risen by almost a full percentage point.
Bestselling author Mark Cantrowitz told Insider that rates are rising because of the Treasury bond auctions.
The new rates apply to any loan taken after July, even if all payments are suspended until October.
Student loans aren’t just expensive for the $ 1.7 trillion-worth of 45 million Americans – they’re about to get more expensive.
The Federal Student Aid Bureau, the largest provider of financial aid to colleges, announced an interest rate hike by almost a full percentage point will come into force in July. It seems surprising when the Federal Reserve has kept interest rates around 0% since the start of the pandemic recession. This week it was said it will be so for years to come. So why is it different for student loans?
Insider spoke with student loan expert Mark Kantrowitz, who has published five bestselling books on the best ways to pay for college tuition and manage student loans. He currently runs privatestudentloans.guru, a free website about loans to pay for college tuition, where he really calculated new interest rates on student loans before the Federal Student Aid Bureau officially posted them on its website.
He explained that the rate hike had nothing to do with the base interest rate or the current suspension of student loan payments without accruing interest – something like President Joe Biden. extended until September after he took office.
According to him, we are talking about the last auction for the sale of 10-year Treasury bonds.
Student loan interest rates are reset every July 1st for a year and are based on a ten-year Treasury bond auction plus a certain margin depending on the student loan type.
Treasury bonds are government securities that help fund government spending, and the May bond yielded 1.684%, up from 0.7% a year earlier. As yields increased, so did the interest rates on student loans, because the rates are tied to an increase or decrease in Treasury notes.
They are usually put up for auction in February, May, August and November, according to the Ministry of Finance.
As Insider previously reported, here are the new interest rates from July 1:
Direct subsidized and unsubsidized loans for students: 3.73%, up to 2.75%;
Direct unsubsidized loans for graduates and specialists: 5.28%, growth from 4.3%;
Direct PLUS Credits for Parent and Graduate or Professional Students: 6.28%, an increase from 5.3%.
People usually buy Treasury bonds because they provide a predictable return. But Kantrowitz explained that the demand for Treasuries is now low because the economy is starting to recover from the pandemic, so the need for stable income is less, which means that interest rates had to rise to stimulate demand.
“It’s formulaic,” Kantrowitz said. “When this auction rate goes up, interest rates go up, and when this auction rate goes down, the interest rate goes down.”
If the borrower took out a loan before July 1, then a new increase in the interest rate on these loans is not applied. However, after July 1, the increased rates will apply to all loans taken out. However, borrowers do not need to make any payments on loans until at least October, and if the pause in payments is extended even further, Education Minister Miguel Cardona said. recently hinted When payments are resumed, the interest rate will depend on when the loans were first received.
Kantrowitz said that even if payments resume in October, if interest rates remain at zero, it “won’t save you that much money.” BUT report Upgraded Points, a travel research group, released on April 5, found that a pause in interest payments during the pandemic saved borrowers an average of only $ 2,001.
So, by and large, this increase in student loan interest rates is likely not to have a significant impact on payments, and is actually small compared to previous years.
Meanwhile, Democrats are calling on Biden to write off $ 50,000 in student debt for each borrower, which Kantrowitz said will immediately impact borrowers with less than $ 50,000 in debt.
“It’s time,” Massachusetts Senator Elizabeth Warren told Insider last week. “We know what the problem is: Student loan arrears are holding back tens of millions of people across the country. People who cannot buy houses, people who cannot buy cars, people who cannot start a small business. We need to cancel student loan debt not only for these people individually, but for our entire economy. “
Read the original article on Business Insider