Student Loan Interest Rates Reset for AY 2014-15

Today, the Treasury Department announced the outcomes of its auction on 10-year notes. For new and returning student loan borrowers, that means the results are in on the interest rates they’ll pay on any federal loans they take out this year. And while the new rates will be higher than they were last year–when they were the lowest in a generation–they’re still lower than even we predicted.

Interest rates for undergraduate Stafford loans will be set at 4.66 percent for the 2014-15 academic year — up from 3.86 percent last year. Before last year’s rates, students could have two different rates on their loans, depending on whether the loan was a Subsidized Stafford or an Unsubsidized Stafford loan: 3.4 and 6.8 percent, respectively. But because many students have both types of loans, the overall weighted interest rate back in AY 2012-13 is probably close to this year’s rates for most students.

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And graduate students and parents of undergraduates will still have lower interest rates than they did just two years ago. Unsubsidized Stafford loans for graduate students will be charged a 6.21 percent interest rate this year, compared to a 6.8 percent rate in AY 2012-13. Parent PLUS loans for parents of undergraduates and Grad PLUS loans for graduate and professional students are set at 7.21 percent, compared with 7.9 percent in AY 2012-13 and 6.41 percent last year.

The new rate-setting system was enacted in the Bipartisan Student Loan Certainty Act, passed late last summer in a last-minute effort to keep interest rates on some loans from doubling. A contentious debate led to a bipartisan compromise that replaced the arbitrarily set interest rates with ones based on interest rates in the economy. In a low-interest rate economy like the one we’re in now–one in which students are likely to struggle more to find high-paying jobs after graduation–the rates stay lower. As the economy improves, the rates will grow, too.

That held true again this year. The rates on today’s auction (2.612 percent) were among the lowest all year, and they were still below rates late last year that peaked above 3 percent.

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Rates are still lower for many students than they were before passage of the Bipartisan Student Loan Certainty Act. That’s because it’s what the law was supposed to do–keep rates on newly issued student loans low for as long as interest rates in the economy stay low.

[Cross-posted at Ed Central]

Clare McCann

Clare McCann is a policy analyst with the Education Policy Program at the New America Foundation. Find her on Twitter: @claremccann