New Student Loan Interest Rates Make for Interesting Times
This time of year is always interesting! (Yes, that is a bit of a play on words.) In the world of financial aid, this time of year is when schools and students anxiously await the announcement of what the new interest rates will be on Federal Direct Student Loans. As you may recall, last year the Bipartisan Student Loan Certainty Act of 2013 was signed into law. The focus of this legislation was to overhaul the Federal Direct Student Loan Programs’ interest rate structure. With this new law, interest rates are determined based upon the high yield of the last auction of the 10-year Treasury notes held prior to June 1 each year, plus a margin, or what is called an “add on”. The change in the law set the rates for the Subsidized and Unsubsidized Direct Loans to undergraduate students at equal rates. Also, the law established the interest for Direct Unsubsidized Loans for graduate/professional level students, as well as Graduate PLUS Loans and Parent PLUS Loans, so that each is at different rates.
The last auction of the 10-year Treasury note prior to June 1 this year was held on May 7, 2014. The results of that auction determine the rates on all new loans first disbursed on or after July 1, 2014 for the 2014-2015 award year. The interest rate on a loan is fixed at the rate that is applicable when it is disbursed and therefore applies to that loan for the life of the loan. Based upon the results of the auction of the Treasury notes, the interest rates for new loans to be first disbursed on or after July 1, 2014, but before July 1, 2015 will be as shown in the chart below.
It is important to again note that the interest rate of a loan will remain at the same rate for the entire life of that loan. But, the interest rates will likely change each year, and 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 as 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): 10-year Treasury Note plus 2.05 percent, capped at 8.25 percent.
- Graduate Federal Direct Stafford loans: 10-year Treasury Note plus 3.6 percent, 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 although the rates announced by ED are slightly higher than the rates for loans first disbursed during the 2013-2014 award year, the rates were very close to what had been projected a year ago. And, even with the slight increase, the interest rates for loans to be disbursed in 2014-2015 are still less than they would have been had the law not been changed last year.
The information provided to you is FAME’s opinion based upon our interpretation of the issues and details provided, and our interpretation of the Title IV regulations, legislation, and U.S. Department of Education guidance, as applicable. FAME shall not be liable for any error contained herein or for any damages whatsoever arising out of or related to the use of this information.