Interest Piqued? Or, Peaked?
Students are in full swing applying for financial aid as they look toward beginning or resuming their postsecondary education soon. That request for financial assistance in many cases, if not most, includes applying for a Federal Direct Student Loan. These loans, known more commonly as Direct Loans (or DLs), have an interesting rate structure—pun intended.
This interest rate structure came about as a result of the Bipartisan Student Loan Certainty Act of 2013 which overhauled the Direct Loan Programs’ prior interest rate configuration. The result of that legislation is that interest rates are now determined based upon the high yield of the last auction of the 10-year Treasury notes held prior to June 1 each year. That yield becomes the “index” in the interest rate formula. A margin, or what is called an “add on,” is added to the index. The rates for the Subsidized and Unsubsidized Direct Loans to undergraduate students are now at equal interest rates based upon this most recent formula composition, as opposed to the former structure that generated different rates for the Subsidized and Unsubsidized loans. Also, the law calculates the interest differently for Direct Unsubsidized Loans for graduate/professional level students, as well as for Graduate PLUS Loans and Parent PLUS Loans, so that each is at a unique rate.
The last auction of the 10-year Treasury note prior to June 1 this year was held on May 11, 2016. The outcome of that auction determines the rates on all new loans first disbursed on or after July 1, 2016. The interest rate on these loans is fixed at the rate that is valid when a loan is disbursed and therefore applies to that loan for the life of the loan. As a result of the auction of the Treasury notes, the interest rates for new loans to be first disbursed on or after July 1, 2016, but before July 1, 2017, will be as shown in the chart below.
It should again be noted that these rates are a fixed rate for any loan made during the time period beginning with a disbursement on or after July 1, 2016, and before July 1, 2017. Students with loans prior to this period may have differing rates on such prior loans, as likely will also, borrowers who take out loans after this defined 2016-2017 award year period.
A final note of importance is in regard to Direct Consolidation Loans. Any Direct Consolidation Loan application that is received on or after July 1, 2013, has the rate calculated based upon a weighted average of the interest rates of the loans being consolidated, rounded up to the nearest 1/8 of one percent. Direct Consolidation Loans are not covered, specifically, by the new interest rate structure highlighted in the chart above. Rather, the DCL interest rate is affected by the effect the individual loans’ rates have on determining the weighted average rate of the loans being consolidated. This, thereby, impacts the new DCL’s interest rate.
What is the bottom line? Potential borrowers (and/or parents of potential borrowers) have had their interest piqued to know if there is a sharp peak in the interest rates. From the borrowers’ perspective, it is a positive point to observe that the rates for the 2016-2017 award year did not reach a new high peak! Quite the opposite occurred. The interest rates for new loans disbursed during the 2016-2017 award year will actually be just over one-half percent lower than the comparable loan rates for 2015-2016. These lower interest rates are sure to pique borrowers’ interest as they consider student loans for the year ahead!
(EA 05132016 FR 06132016)
This material is presented for informational and educational purposes only and should not be considered to be giving legal advice.