Breaking news for student loan borrowers: We now know what interest rates will be on federal student loans for the 2018/19 school year.
- Subsidized and Unsubsidized Direct Loans for undergraduate students: 5.045%
- Unsubsidized Direct Loans for graduate students: 6.595%
- Direct PLUS Loans for graduate student and parents of undergraduate students: 7.595%
Unfortunately, these rates represent a little over half a percent increase in rates over those for the 2017/18 academic year.
Federal student loan rates are reset each July 1 based on the 10-Year Treasury Note rate as of June 1. The Treasury Department just held its final 10-Year Note auction scheduled prior to June 1, so we now know that Treasury Note rate, and, it follows, the upcoming student loan rates.
Note that these 2018/19 interest rates are fixed for the life of any loans disbursed between July 1, 2018 and June 30, 2019, and are applicable to both first-time and returning student borrowers. Loans borrowed before or after these dates are locked in at whatever rate was applicable at the time of disbursement.
This moderate 0.595% increase in rates will likely cost the typical undergraduate borrower around $200 over the life of their loan(s). Graduate student and parent borrowers will feel a more substantial impact, as they are allowed to borrow more money on an annual basis from federal education loan programs.
As interest rates get higher, it is important to remember to only borrow what you need to; interest-free tuition payment plans are a great option to help minimize borrowing. And try to keep up on interest payments while enrolled in college to avoid interest capitalization when entering repayment. Capitalized interest is added onto the principal balance of the loan and, therefore, begins accruing interest itself, so whatever you can pay down prior to (or within six months of) graduation will provide a significant savings to you in the long run. If considering a graduation gift for a college senior, a payment toward accrued interest on student loans is truly a gift that keeps on giving.