Blog

Interest Rising

June 6, 2017
|

Some things just naturally keep your interest.  One item of which most college students are acutely aware, and which attracts “interest” each year, is the interest rate that will be applicable to loans taken out for the new award year.  Although federal student loans taken out after July 1, 2013, have a fixed interest rate structure, loans borrowed in each award year have a different interest rate than the prior year.  The loans to be borrowed in the award year of July 1, 2017, through June 30, 2018, are no exception.  And, it is of note that interest is rising.

As those keen on this topic may recall, a new method of rate determination came about as a result of the Bipartisan Student Loan Certainty Act of 2013, which overhauled the Federal Direct Student Loan Programs’ interest rate structure.  The result of that Act 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 at equal interest rates based upon this 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.  The result is that each of the categories of loans is at a unique rate.

The last auction of the 10-year Treasury note prior to June 1 this year was held on May 10, 2017.  The high yield at that auction was 2.400%.[1]  That yield rate helps establish the rates on all new loans first disbursed on or after July 1, 2017.

The U.S. Department of Education (ED) announced the interest rates for loans to be disbursed on or after July 1, 2017, but before July 1, 2018, in an Electronic Announcement on May 30, 2017.[2]  Consequently, the interest rates for such new loans to be first disbursed on or after July 1, 2017, but before July 1, 2018, will be as shown in the chart below.  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.

Again, the rates in the chart are a fixed rate for any loan made during the time period beginning with a disbursement on or after July 1, 2017, and before July 1, 2018.  Students with loans prior to this period may have different rates on such former loans as likely, also, will borrowers who take out loans after this defined 2017-2018 award year period.

Noticeably absent in the chart is any indication of rates for Federal 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.  Therefore, 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.  Of note, also, is that DCLs do not have a cap or maximum on their interest rates.  Rather, as stated, the rates on DCLs are calculated based upon the weighted average of the loans consolidated.

Further, it is important to keep in mind that for students who borrowed prior to July 1, 2013, the interest rate structure was different.  So, a student who borrowed previously may have loans with an interest rate calculated by a different basis, or that was otherwise established by law at the time.  Borrowers who obtained loans under the former Federal Family Education Loan Program (FFELP), with loans disbursed prior to June 30, 2010, may have various loans using a number of different formulas.  (See ED’s Electronic Announcement dated May 31, 2017, for a chart of such prior FFELP loan interest rates that are currently applicable.  Note that ED does state that those charts will again be updated “the end of June.”[3])

What is the key takeaway of this news from ED?  As the overall economic news in the country is looking more favorable, interest rates are impacted.  This is evidenced, in part, with the Treasury auction in May.  As a result the rates for the 2017-2018 award year did rise slightly over the rates for 2016-2017 loans—an increase of less than 70 basis points, or less than 0.7 percent.  Although loans for this year are fixed at the rates listed in the chart above, rates for loans in a student’s future years can be different, which may be more, or less, favorable to the borrower.  As always, while student loans may be a useful tool to assist in paying for higher education, borrowers should use discretion deciding an amount to borrow to avoid paying more interest than necessary over the life of a loan.

[1] Treasury News, U.S. Department of the Treasury, May 10, 2017, at https://www.treasurydirect.gov/instit/annceresult/press/preanre/2017/R_20170510_1.pdf

[2] Electronic Announcement, U.S. Department of Education, May 30, 2017, at https://ifap.ed.gov/eannouncements/053017DirectLoansInterestRates070117t063018.html

[3] Electronic Announcement, U.S. Department of Education, May 31, 2017, at https://ifap.ed.gov/ffelvarrates/053117FFELVarInterRatesPeriodJuly1June30.html

______________________________________________________________________
This material is presented for informational and educational purposes only and should not be considered to be giving legal advice

Leave a Reply

Your email address will not be published. Required fields are marked *