The Upside of the Upswing of the Student Loan Interest Rate

Student Loan Interest Rate Increase

One thing that necessarily shapes every student’s loan journey is their student loan interest rate. For federal student loans in the U.S., this rate has just gone up.

Now, the idea of paying more on a loan does not elicit immediate joy and exclamations of, “Oh, thank heavens!” In fact, many of us shake our heads, maybe roll our eyes at the inevitability, maybe mumble some deprecatory remark about those higher-ups who must not understand the plight of fighting debt. Right, well, despite the obvious downside of paying more interest on a student loan, this rise in federal loan interest rates actually has an encouraging explanation and a reassuring limitation.

The Rates and How the Government Determines Them

First, the numbers. Beginning in July, undergraduate Direct Loans will go from 4.45 percent to 5.045 percent; graduate Direct Loans will increase from 6 percent to 6.595 percent; Parent and Grad PLUS loans will go from 7 percent to 7.595 percent.

A recent podcast episode for Off the Cuff went over these numbers, explaining how these interest rates are tied to the market. In the episode, NASFAA’s president and CEO, Justin Draeger, says a student loan interest rate is a variable fixed rate. And, as mentioned, the rate has a direct tie to the market. This precludes setting an arbitrary rate that might allow for financial abuse. For example, if the interest rate increased by a couple points simply to make more money off of student loans. Instead, like many interest rates, this one relies on the U.S. 10-year Treasury notes. Because those yields have risen, interest rates have risen.

The Comforting Ceiling for Student Loan Interest Rates

As mentioned before, Congress has set a cap on how high federal student loan interest rates can rise. The Washington Post reported on this year’s rise in student loan interest rates. The article went over the interest rate ceiling numbers: undergraduate loans cannot exceed 8.25 percent, graduate loans will not push beyond 9.5 percent, and parent loans will not rise above 10.5 percent. Yes, those would be very high interest rates—but that is the highest it could go. These kinds of limitations prevent all sorts of unforeseeable loan atrocities.  

We see, then, that we can have security in knowing the government determines interest rates in an objective fashion, and comfort in knowing interest rate increases will stay under a certain number. Furthermore, because the rate is a variable fixed rate, the new increase will not apply to loans already received.

There is plenty more nuance to study in regards to what this increase means, of course. I have lined out the larger factors, but if you are interested in thinking more about the implications of this rate increase, Episode 72 of Off the Cuff is a fantastic place to start (specifically 15 minutes in).

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