Falling Interest Rates Great For Student Loan Borrowers

Students that need to borrow money for college, and their parents, just got some good news about interest rates for student loans. The interest rates for federal student loans will be historically low for the 2016-2017 school year, dropping to their lowest level in a decade. The new rates take effect July 1.

The interest rate on the most common student loans, Federal Direct Loans for undergraduates, just dropped to 3.76 percent for loans disbursed between July 1 and June 30 of 2017. Last year, the interest rate was 4.29 percent. Previously, it was 4.66 percent. Between July 1, 2006 and June 30, 2010, the interest rate for Direct unsubsidized loans was 6.8 percent for undergraduate and graduate students.

Interest rates on federal student loans taken out by parents and graduate students fell as well, dropping to 6.31 percent from 6.84 percent. The rates are only good for loans taken out to pay for the 2016-2017 academic year. This will be the second year in a row that the interest rates for federal student loans have dropped. However, there is no telling whether the rates will climb next year.

President Barack Obama signed a law in 2013 that tied federal student loan interest rates to the 10-year treasury note. Now, new student loan rates are set every year by the last 10-year treasury note auction before June 1. The high yield of the 10-year note was 1.71 percent on May 11. Rates are determined by adding 2.05 percentage points to the high yield of the 10-year note at the time of the auction. The addition is meant to cover the administrative costs of issuing these government-backed loans.

Before the new law was enacted, Congress would just pick an interest rate and the rate would stay the same until Congress passed another law. Now, Congress decided to tie federal student loan rates are tied to the market. It is estimated that this policy has saved students more than $51.5 billion dollars in additional interest on their loans over the past four years.

While many feared that the policy would eventually lead to higher rates as the economy improved, interest rates have been falling since the policy took effect. This fear was so widespread that Congress put caps in place to prevent federal student loan rates from skyrocketing. Congress set a cap of 8.25 percent on undergraduate Direct loans and a 9.5 percent cap on graduate loans. Parent PLUS loans currently have a cap of 10.5 percent.