Students who must borrow to help pay college tuition will get a little bit of a break in the coming school year.
Starting July 1, the rate on new undergraduate loans made under the federal Stafford program will fall to 4.29 percent, down from 4.66 percent for loans issued in the last academic year. The new rates apply to both subsidized loans, based on financial need, and unsubsidized loans, which are made regardless of financial need.
“It’s good for students borrowing for the coming school year,” said Lauren Asher, president of The Institute for College Access and Success.
Rates will fall for other categories of education loans as well. The rate on unsubsidized Stafford loans to graduate students, for instance, will drop to 5.84 percent from 6.21 percent, while the rate on PLUS loans, for parents and graduate students, fall to 6.84 percent, from 7.21 percent. (More details about loan terms for the coming year are available on the Ticas website.)
Under a new method adopted by Congress in 2013, annual rates for federal student loans are based on the rate on the 10-year Treasury note in the spring, plus an additional margin that varies depending on the type of loan. Rates change each year, but once you borrow the money, the rate remains fixed for the life of the loan.
The drop this year is a change from the most recent academic year (2014-15), when rates rose from the previous year.
Although any decrease is welcome, the resulting interest savings are relatively modest, and the reprieve may be short-lived, once the Federal Reserve moves to raise interest rates. Rates on student loans are projected to rise starting next year, and to continue doing so for the next several years after that, according to an analysis from the institute using figures from the Congressional Budget Office. For the 2016-17 school year, rates for undergraduate loans are projected to move above 5 percent, and by 2018-19, above 6 percent.
Those who are already repaying their student loans were warned by the federal government to beware of scams that may target them online.
Struggling borrowers using search terms like “student loan default” or “Obama student loan relief” may end up on sites that charge large fees to help them enroll in loan assistance programs that they could access themselves free of charge, according to the Consumer Financial Protection Bureau.
Rohit Chopra, the bureau’s student loan ombudsman, sent letters this week to Google, Bing and Yahoo, urging them to work with the government to ensure search engines are not being used to prey on student loan borrowers by directing them to sites that imply an affiliation with the federal government.
Statements from Microsoft and Google indicated they were attuned to the problem. “We have an extensive process for filtering and monitoring Bing traffic against known fraudulent patterns to help detect and prevent against fraud and phishing techniques,” Microsoft said in a statement.
Google said: “We work hard to keep our advertising ecosystem clean and last year alone we disabled more than 524 million ads. When we become aware of an ad that violates our policies, we’ll not only remove it, but in many cases remove the advertiser as well.”
Here are some additional questions about student loan interest rates:
- Since rates are lower, should I borrow as much as I can for next year?
While it’s great that rates will dip, students should still avoid piling on debt if they can, said Ethan Senack, higher education advocate with the U.S. Public Interest Research Group. “Generally, they should borrow as little as possible,” he said, noting that heavy student debt can infringe on your ability to do other things after you graduate, like buy a car or a house.
Plus, said Mark Kantrowitz, publisher of Edvisors.com, there are limits on the amount of federal borrowing you are allowed to do — not only in the aggregate, over the course of your college career, but for each separate year that you are a student. For dependent undergraduates, or most students under age 24, the maximum annual amount is from $5,500 to $7,500, depending on your year in school — and separate, lower caps on subsidized loans apply as well.
- Is there a cap on the interest rate for student loans?
Yes, there are caps that vary depending on the type of loan. For undergraduate loans, the cap is 8.25 percent; for graduate Stafford loans, it’s 9.5 percent; and for PLUS loans, it’s 10.5 percent.
- Can I get a lower interest rate by making loan payments automatically?
Borrowers can typically get a 0.25 percent reduction in their interest rate if they agree to have regular monthly payments automatically deducted from their bank account.