There’s very little to celebrate when it comes to taking out student loans, but if you’re borrowing for the coming academic year, you have reason to let out a small cheer: Your loans will be cheaper.
That is, they will be if you’re taking out Federal Direct Loans (the most common kind), because the new interest rate on these loans goes into effect July 1, and it’s the lowest rate these loans have had in years.
When President Barack Obama signed a new student loan bill into law in 2013, an annual reset of federal student loan interest rates began. That law tied interest rates on government education loans to the 10-year Treasury note yield, and every year, the rates are set by the last auction of that note before June 1. For the interest rate that will be in effect from July 1, 2016, to June 30, 2017, that auction happened May 11, when the high yield of the 10-year note was 1.71%.
Add 2.05 percentage points to that yield, and you have the new interest rate of 3.76% for the undergraduate federal student loans (Congress wrote that into the 2013 law to cover the administrative costs of issuing the government-backed loans). Direct unsubsidized loans for graduate students will have a 5.31% interest rate, and Direct PLUS loans (for parents and graduate students) will have a 6.31% interest rate.
Last year, interest rates on the same loans were a tad higher: 4.29% for undergraduate loans, 5.84% for Direct unsubsidized graduate loans and 6.84% for PLUS loans. In 2013, Congress set a cap on how high these interest rates can get (8.25% on undergraduate loans, 9.5% on graduate loans and 10.5% on PLUS loans), but contrary to many estimates when this process first became law, the interest rates haven’t climbed much closer to those rate caps. While the underlying factors behind these low interest rates may not mean great things for savers and the overall economy, at least student loan borrowers can enjoy relief in this area. [Editor’s note: This story has been updated to reflect the interest rate changes to Direct unsubsidized graduate student loans.]
Of course, these low rates only apply to the loans taken out in the next 12 months. Existing borrowers have to deal with the interest rates as they were when they took out their loans, unless they look into refinancing their loans with a private lender. (The Education Department doesn’t offer student loan refinancing, though some borrowers may qualify for a Direct Consolidation Loan. Still, federal student loan consolidation doesn’t lower your interest rate — it averages the rates of all the loans you’re consolidating, which doesn’t translate into interest savings.)
The interest rate is only one part of what determines a borrower’s student loan payment, and if you’re struggling to afford yours, there may be some things you can do to ease the burden. Federal student loan borrowers may qualify for income-based repayment plans, student loan forgiveness or other repayment options that can bring short-term relief from high debt.
However you go about it, paying your student loans is incredibly important, because they generally cannot be discharged in bankruptcy, and, like any debt, student loans influence your credit standing. Making your student loan payments on time every month can help you build a good credit score, and you can keep track of your student loan’s affect on your credit by reviewing two of your credit scores for free every month on Credit.com. If you need help making your loan payments, don’t put off asking for it. One of your first steps should be to contact your student loan servicer and try to figure out a way to stay current on your loans.
More on Student Loans:
- A Credit Guide for College Graduates
- How to Pay for College Without Building a Mountain of Debt
- Strategies for Paying Off Student Loan Debt