May 12, 2017

Question: What Are The New Interest Rates on Federal Student Loans?

Answer: 4.45% for federal direct student loans effective July 1, 2017 (up from 3.76% for 2016-17 school year).

Why the increase? Student loan interest rates are now tied to the 10 Year Treasury Bond interest rate.

From Bloomberg:

New undergraduate loans from the Department of Education are due to carry an interest rate of 4.45 percent, up from 3.76 percent for the academic year ending in June. Rates on some graduate loans are set to rise from 5.31 percent to 6 percent, while rates on loans to parents and guardians are due to experience a jump from 6.31 percent to 7 percent.

Question for students:

  • With average student loan balances for graduates of about $30,000, what impact will this increase in interest rates have?  (Admittedly, these rates change every year so using one interest rate for debt accumulated over several years is a gross simplification)
    • Here’s a loan calculator that you can use for this exercise
    • Assume 10 year repayment term
    • Calculate costs using a 3.76% interest rate and then run the analysis again assuming a 4.45% interest rate over that term
    • What is the increased cost of the loan as expressed by the monthly payment? over the life of the loan?

___________

We update our curriculum on a regular basis, so look for these student loan rates to be adjusted for July 1st. Check out our website for more Paying for College Activities!

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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