Fed Hikes Student Loan Interest Rates

Michael Lux Blog, News 0 Comments

Student loan interest rates for loans disbursed in the 2014-2015 school year are expected to be about 1% higher than they were for this past school year.

Because the increase of one percent doesn’t seem like that much, especially to current students who don’t yet appreciate the burden of student debt, there has not been much discussion on this rate hike.

This is in stark contract to the summer of 2013, when people were very vocal about a potential rate hike from 3.4% to 6.8% for undergraduate loans.  After much debate, Congress tied student loan interest rates to 10 year treasury bonds.  We pointed out how this new law could result in interest rates even higher than the 6.8% that outraged everyone.

Last year, undergraduate loans were charged an interest rate of 3.86%.  This year, students can expect to pay approximately 4.86%.  Graduate students can expect to pay about 6.41% for the upcoming school year.

The slow increase in interest rates…

In 2013, people were outraged at the idea of a 6.8% interest rate for undergraduate students.  They pointed out that student debt is not dischargable in bankruptcy and as  result the government bears little risk on these loans.  Reference was also made to the fact that the government currently profits from its student loan lending.

Most people seemed happy with the 2013 law because it lowered interest rates to 3.86%, but what they failed to see was that it created a system in which students could end up paying over 8% for their undergraduate student loans (for graduate students, the max was set above 10%).

This week we learned that the interest rates will be climbing just one percent.  If the economy continues to make gains, we can expect even higher interest rates in the years to come.  Absent future action from Congress, the cost of borrowing money for college seems poised to grow.

One Important Note…

Just because the interest rate on federal loans s growing, it does not mean that students should avoid these loans in favor of private loans with slightly lower interest rates.  As we have noted, the perks of the federal loans make them far superior to private loans.

All student loans are bad, and should be avoided whenever possible.  Choosing federal loans over private loans is simply choosing the lesser of two evils.  Today’s news merely means that the “lessor evil” just got slightly worse.