Federal student loan interest rates, the cost of borrowing money to be paid at a fixed rate over the life of the loan, are set by adding 2.05% for undergraduate loans to the 10 Year Treasury Rate after the last May auction each school year. [For the upcoming 2021-22 school year, loan interest rates will be set after the May 13, 2021 10 Year Treasury auction.]
According to current Federal law, each school year,
The [Federal] Department of Education uses the following formulas [to set loan interest rates]:
– Undergraduate Direct Loans: 10-year Treasury yield plus add-on of 2.05%
– Graduate Direct Loans: 10-year Treasury yield plus 3.6%
– Grad and Parent PLUS loans: 10-year Treasury yield plus 4.6%
Congress has set upper limits capping student loan interest rates at 8.25% for undergraduate loans, 9.5% for graduate loans, and 10.5% for PLUS loans.Forbes, May 12, 2020
The 10 Year Treasury rate has increased from 0.63% last May 14, 2020, allowing college students the envious opportunity to borrow at unprecedented low rates during the 2020-21 school year.
Since those lows last year, the 10 Year Treasury rate has now returned to levels last seen in 2019 in a range between 1.55% and 1.75%. Therefore, barring a collapse in the 10 Year Treasury rate between now and May 13, 2021, college students seeking to borrow for the upcoming 2021-21 school year will be paying a higher cost to do so.
For example, at the current 10 Year Treasury rate of 1.57%, I forecast that 2021-22 school year undergraduate loan interest rates will be 3.62%, while Parent PLUS loans will be 6.17%.
For families in the throws of their final deliberations to choose a college by May 1, understanding the cost of borrowing, which will add to the overall expense of a college degree in the immediate term and long term, since students, by borrowing are spending future income not yet earned or even guaranteed in the future, is prudent.
Total Parent PLUS loan debt has been increasing in recent years to $98 Billion currently. The average Parent PLUS loan in 2019 according to studentloanhero.com was $37,200 (for one year). If that loan was repaid over the course of ten years, though it could be paid over even a longer period of time, the borrower would pay approximately $13,000 in interest for a total loan cost of approximately $50,000 over the life of the loan. So, it is worth the effort to look at all options to pay for college.
As the Federal loan interest rates, both for students and parents, will NOT be finalized until after the May 1 college enrollment deadlines, families would be prudent to incorporate the most educated interest rate forecasts in both assessing the value of a college degree and how that degree can best be obtained amongst the colleges to which their student has been admitted, a decision with wide-ranging impacts well into the future is about to be made.
For more information about how to both plan for and navigate the complex college admissions process in order to minimize the risk of educational malinvestment, find us at Creative Marbles Consultancy