Predicting The Future Of Federal Student Loan Interest Rates

By Brittany Hackett, Communications Staff 

The passage of the Bipartisan Student Loan Certainty Act in late July 2013 sparked a national conversation about what the new market-based rates might mean for student borrowers. It was clear that as long as the market rate remained low, the new rate structure would be, for the most part, beneficial to students. Still, some wondered whether the rates might skyrocket, hurting students in the process. 

Under the act, interest rates for student loans borrowed on or after July 1, 2013, are based on the 10-year Treasury bill plus the following add-ons:

  • 2.05 percent for undergraduate Stafford (subsidized and unsubsidized)
  • 3.6 percent for graduate Stafford
  • 4.6 percent for PLUS (parents and graduate students)

At the time of it’s passing, NASFAA voiced support for the bill, explaining that students would benefit as the result of the “comprehensive, long-term solution on student loan interest rates.” The change “will ensure that federal student loans stay on par with—or cost less than—private education loans, which contain fewer safeguards for students and parents,” President Justin Draeger said in both Congressional testimony and a statement.

Beyond just keeping pace with private loan interest rates, the bill protects against the threat of unforeseen circumstances by imposing a cap to ensure interest rates never exceed 8.25 percent for undergraduate students, 9.5 percent for graduate students, and 10.5 percent for PLUS borrowers. Loans are also “variable-fixed,” meaning students receive a new rate with each new loan, but then that rate is fixed for the life of the loan. This protects students from seeing interest rates spike on a loan that initially had a lower interest rate.

Before last summer’s deal was struck, federal student loan interest rates for Direct Subsidized loans doubled to 6.8 percent, spurring students all over the nation to start the “Don’t Double My Rate” campaign on social media channels like Facebook and Twitter. 

While it’s true that the interest rates increased on July 1 of this year— from 3.85 percent to 4.66 percent for both undergraduate Direct Subsidized and Unsubsidized Loans, 5.41 percent to 6.21 percent for Direct Unsubsidized Graduate Loans, and 7.21 percent from 6.41 percent for Direct PLUS Loans— had the Student Loan Certainty Act not been passed retroactively, all rates  would have been set even higher than current levels.

So will we continue to see the rates stay low for the foreseeable future?

While it’s difficult to predict the future, April 2014 data from the Congressional Budget Office (CBO) projects that interest rates will remain below the capped amounts for all three types of loans (undergraduate Direct Subsidized and Unsubsidized, graduate Direct Unsubsidized and Direct PLUS) from now until 2024. However, CBO also projected that interest rates would exceed 6.8 percent (the previous undergraduate Stafford loan interest rate) by 2017 and for graduates by 2015. 

But several other analyses indicate that interest rates are trending far below CBO projections. Brian Levitt Senior Economist with Oppenheimer Funds speculates that interest rates in general are likely to stay low for the foreseeable future, largely because central bankers are still working to level out employment and financial stability across the major economic regions of the world. The Federal Reserve indicated recently that interest rates would stay low for a considerable time even after quantitative easing has ended (the Federal Reserve bond-buying program). For now at least, most economists agree that the growth potential and supply and demand of the U.S. economy is not likely to support significant spikes in interest rates.


Publication Date: 9/26/2014

Tami S | 9/26/2014 11:33:15 AM

Student loan interest rates are out of line of what consumers can get for car and mortgage rates. What needs to change are lower add-on numbers and the high cap percentages that provide little protection to student loan borrowers. Added to student loan costs are the ever increasing loan fees which should be eliminated. These are not "good" loans.

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