What's 80 bps among friends?
Federal student loan rates for 2014-2015 change in July. While the formal announcement from the Department of Education isn't expected until June, the change in rates is based on the 10-year Treasury note auction held May 5, the last 10-year auction before June 1st.
The average yield for the 10-year note auction was 2.61 percent, 80 basis points, bps, over last May's average auction yield of 1.81 percent. A basis point is one-hundredth of 1 percent.
Keep in mind this is for "new money" loans. Outstanding student loans aren't impacted by these new rates. More on that later.
The table shows what 80 basis points means for student loan interest rates in the upcoming academic year.
Federal student loan rates
|Loan type||2013-2014 loan rates||2014-2015 loan rates||Increase||Maximum loan rate cap|
|Loan type: Stafford undergraduate loans||2013-2014 loan rates: 3.86%||2014-2015 loan rates: 4.66%||Increase: 0.80%||Maximum loan rate cap: 8.25%|
|Loan type: Stafford graduate loans||2013-2014 loan rates: 5.41%||2014-2015 loan rates: 6.21%||Increase: 0.80%||Maximum loan rate cap: 9.50%|
|Loan type: Direct PLUS loans||2013-2014 loan rates: 6.41%||2014-2015 loan rates: 7.21%||Increase: 0.80%||Maximum loan rate cap: 10.50%|
The interest rates for subsidized and unsubsidized undergraduate Stafford loans are the same. The difference between the two loans is that subsidized Stafford loans don't accrue interest expense while the student is enrolled in college.
Although no one likes borrowing at a higher interest rate, I suggest that borrowers got lucky. The 10-year Treasury note was expected to be north of 3 percent this year and it continues to vex savers and benefit borrowers.
U.S. Sen. Elizabeth Warren, D-Mass., just co-sponsored a bill with 23 other Democratic senators that will let borrowers with outstanding student loan debt refinance their debt at these new rates. The act, called the Bank on Students Emergency Loan Refinancing Act, has a companion bill being introduced in the House. Bankrate will let you know if and when that option becomes available.
The press release from Warren's office had some interesting statistics. "There are nearly 40 million Americans with outstanding student loans. The Bank on Students Emergency Refinancing Act could lower payments for millions of those individuals by hundreds or thousands of dollars a year. The average student loan debt among those who borrow to get a bachelor's degree is nearly $30,000 -- and a shocking 30 percent of federal direct student loan dollars are in default, forbearance or deferment."
I'm all for investing in America's future by people investing in education. Not everyone is going to realize a return on that investment that will allow them to service their student loan debt. Having 30 percent on the federal direct student loans in default, forbearance, or deferment says to me that there needs to be a risk premium built into student loan interest rates. These new rates aren't excessive for unsecured debt taken on to invest in that future.
If you or a loved one is headed off to a university this fall, how will these higher student loan rates impact your decision concerning that education? Learn more about student loans by reading "8 things to know about federal student loans."
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