College students in the U.S. who take out federal loans are likely to see interest rates jump — potentially by a percentage point or more — in the coming academic year.
Last year, the government began to peg rates on most student loans to the Treasury 10-year note. Stafford loans, the most widely borrowed, carried an undergraduate rate of 3.86 percent for the 2013-2014 school year. In the past three months, the 10-year yield has traded 0.80 to 1 percentage point higher than a year ago, which means education borrowing costs may rise.
Interest rates for the school year beginning July 1 will be determined following the Treasury’s 10-year note auction Wednesday. While interest rates are fixed for the life of an education loan, borrowers take out a separate loan for each school year. Federal loans make up most of the $1.2 trillion in outstanding education debt, which has become a drag on the economy in recent years as many borrowers struggle to repay.
“The interest rates that people are going to be paying on these student loans are going to go up, making the cost of college that much more burdensome,” said David Ader, head of interest rate strategy at CRT Capital Group LLC. “As the years come on, they’re more likely to come up than come down.”
In the current year, graduate Stafford loans had a 5.41 percent interest rate, while PLUS loans for graduate students or for parents paying their undergraduate children’s college costs were set at 6.41 percent.
The Congressional Budget Office projected rates for the 2014-2015 school year of 5.09 percent for undergraduate Stafford loans, 6.64 percent for graduate Staffords and 7.64 percent for PLUS loans, according to the Consumer Financial Protection Bureau.