Starting back in July, the government now charges families less to borrow money for college as newly lowered interest rates on federal student loans take effect.
The annual rate change is pegged to the Treasury Department’s auction of 10-year notes in early May. Based on the rate of the note, plus a fixed margin, the interest on student loans can rise or fall from one year to the next. And for the past two years, rates have climbed. This year, families will get a reprieve.
For the 2019-20 academic year, undergraduate students will pay 4.53% in interest on new Stafford loans, down from 5.05%. Graduate students will see the interest rate on new Direct loans decline from 6.6% to 6.08%. And parents who take on federal debt to help their children pursue a degree can expect to pay 7.08% instead of 7.60%.
The new rates are good only for the coming academic year and only for new loans.
Assuming a 10-year repayment term, Mark Kantrowitz, publisher of the student lending website PrivateStudentLoans.guru, projects that the new rates will lower a borrower’s loan payments by about 2.4%. That may amount to just a few dollars in savings, but for families who borrow money every year to cover the cost of college the difference matters.
There is no telling whether interest rates will continue to decline or rise, but Congress set a ceiling to prevent federal student loans from becoming too costly. The interest on undergraduate loans can never go higher than 8.25%. Graduate loans are capped at 9.5%, while the limit on PLUS loans—for eligible parents as well as graduate and professional students—is 10.5%.
In addition to lower interest rates, families who borrow will also benefit from lower loan origination fees this fall. The federal government will charge a 1.059% fee on undergraduate Stafford loans, instead of the current 1.062% fees. Graduate students and parents will face a 4.236% fee, down from 4.248%. The lower fees will apply to loans issued October 1, 2019 through September 30, 2020.
Origination fees are a point of contention in higher education. The Education Department assesses a fee on federal student loans that can equal as much as 4% of the amount borrowed. Instead of charging fees upfront, the agency subtracts the money directly from the loan amount before distributing the funds. All the same, borrowers must repay the entire loan amount, plus interest. The setup has been criticized by financial aid groups as a burdensome tax on families.
—Danielle Douglas-Gabriel | The Washington Post