New student loan borrowers are about to pay more starting in July when the federal government increases interest rates.
The rates on federal student loans will increase .69 percentage points across a slew of loan products for the 2017-2018 school year.
Individuals who take out loans between July 1, 2017 and June 30, 2018 will pay 4.45% interest on undergraduate direct subsidized and unsubsidized loans, up from the current rate of 3.76%. Subsidized loans do not accrue interest while borrowers are in school or the loans are in deferment, while unsubsidized loans begin accruing interest right away.
Graduate direct unsubsidized loans will tick up to 6% and PLUS loans — loans given to the parents of students in school — will increase to 7%.
This increase takes the federal student loan interest rate to its highest level since July 2014.
The rates, which are set by Congress, are linked to the 10-year treasury yield. The fluctuating price and interest rate of the treasury bond is generally seen as a measure of investor confidence in the American economy.
During periods of low confidence, investors seek safe products, leading them to buy up treasury bonds, which increases the price of treasuries while decreasing their interest rate. Conversely, during periods of high confidence, investors don’t feel the need to invest in safe products and look instead to other investments, which results in a lower bond price, but higher interest rates on treasuries.
While increasing investor confidence driving up the 10-year treasury is a good sign for the economy overall, it means that students taking out new loans will be on the hook to pay more in interest to the government for the cost of their education.
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