The response to the one word question in the title of this article resounds with a definite, “Yes!” That is especially the response for student loan borrowers this coming award year. The much anticipated announcement of the new interest rates for loans first disbursed on or after July 1, 2015, has been made. And, the notice is favorable for borrowers who will be obtaining one of the loans available through the Federal Direct Student Loan Programs. Interest rates have nudged downward!
As a reminder, the Bipartisan Student Loan Certainty Act of 2013 overhauled the Direct Loan Programs’ interest rate structure. 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. To the index is added a margin, or what is called an “add on”. The rates for the Subsidized and Unsubsidized Direct Loans to undergraduate students are at equal interest rates under this change in the law, 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 13, 2015. The outcome of that auction determines the rates on all new loans first disbursed on or after July 1, 2015. 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, 2015, but before July 1, 2016, will be as shown in the chart below.
Although it may be common to think of the new interest rates being generally applicable to the 2015-2016 award year, there is actually a broader understanding that is key. To illustrate, consider a student who may be enrolled in a “crossover period” that begins on or before June 30, 2015, that crosses over into July or August of 2015 (or later). The borrower in such a case will have loans generated at the new interest rates shown above if the loan is disbursed on or after July 1, 2015. However, if the loan for the crossover period is disbursed on or prior to June 30, 2015, the interest rate will be the rate applicable to the prior year’s interest rate period of July 1, 2014, through June 30, 2015. Therefore the disbursement date is critical for students enrolled in crossover periods as it has potential to impact the borrower’s interest rate.
It is important to again note that the interest rate of a particular loan remains constant for the entire life of that loan. For example, an undergraduate student who borrows a Direct Subsidized Loan that is disbursed after July 1, 2015, will have an interest rate of 4.29% on that loan until it is paid off. However, the interest rates will likely change each year, based upon the auction of the Treasury note. Therefore, new loans obtained by a borrower in any subsequent year will likely have a different rate than prior loans a student or parent receives. The rate changes are based upon the difference in the 10-year Treasury note yield when auctioned. The margin, or “add-on” percentage, does not change since that is written into the law. The rates for the loans are also capped based upon the type and/or grade level of the loan being borrowed. This means that regardless of what the outcome of the 10-year Treasury note auction is, the rates on the loans may not exceed the caps prescribed in the law. The caps are as follows:
- Undergraduate Federal Direct Stafford Loans (subsidized and unsubsidized): capped at 8.25 percent.
- Graduate Federal Direct Stafford Loans: capped at 9.5 percent
- Federal Direct PLUS Loans (graduate and parent): capped at 10.5 percent.
As has been the case in the past, there is no change in the way the interest rates for consolidation loans are calculated. The rate for a Federal Direct Consolidation Loan continues to be based upon the weighted average of the loans that are being consolidated, rounded up to the next higher one-eighth of one percent. There is no cap or maximum interest rate on Direct Consolidation Loans.
One last note of interest is that the rates announced by ED for loans first disbursed on or after July 1, 2015, are appreciably lower than the previous rates for loans first disbursed on or after July 1, 2014 through June 30, 2015. The interest rates were reduced by 0.37%—more than one-third of a percentage point—for each of the loan types compared to the prior year’s rates. That makes the new rates even more interesting, in a most favorable way!
This material is presented for informational and educational purposes only and should not be considered to be giving legal advice.
(EA 10012014; 01122015; 04132015; 05042015; 05072015)