The US government updates the interest rates for federal student loans every school year. Unfortunately for those planning to take out loans for the 2017-2018 school year, you will see an increase in these rates offered by the government.
Interest rates for undergraduate loans will increase from 3.76% to 4.45% next year.
Interest rates on graduate school loans will rise from 5.31% to 6%. The annual limit for the direct unsubsidized loan is $20,500, so if you need to take out more loans, you’ll need to take the remaining from a Graduate PLUS loan.
Graduate PLUS and Parent loans
Interest rates on Graduate PLUS and Parent loans will increase from 6.31% to 7%.
These changes only affect loans that are taken out from the federal government during the 2017-2018 school year. Interest rates on loans taken out from previous school years will not change. For example, if you took out an undergraduate loan during the 2016-2017 school year, the interest rate will remain 3.76% for the life of that loan. All federal loans provide fixed rates, so the interest rate you receive each specific school year will never change.
Why are the rates increasing?
The government updates the interest rates on federal student loans every year. The rates are tied to the May 10-year Treasury auction, which showed an increase of 0.69% this past year. This means that all federal loan interest rates will increase by this amount for the 2017-2018 school year. While this is discouraging news, student loan interest rates have been at historically low levels in the past few years. For example, when I attended grad school in 2011-2012, I was looking at rates of 6.8% and 7.9%
The chart below shows how federal student loan interest rates have changed over the years.
What About Future Increases?
Unfortunately, interest rates are likely to continue to rise in future years if the Federal Reserve continues to increase interest rates. Be aware of this in your financial planning if you anticipate taking out student loans in upcoming years as well. There are limits in place to ensure that interest rates cannot exceed certain levels. The limits are 8.25% for undergraduate loans, 9.5% for graduate loans, and 10.5% for Grad PLUS loans. So, while this year’s increase will sting a little bit, at least it’s not close to the ceiling rates.
Should You Consider Private Loans?
Federal loans are typically still a better option than private loans because of the benefits they provide, like Income Driven Repayment and Public Service Loan Forgiveness. However, it may be worth checking out private lenders (like College Ave or Connext) if you’re able to find a lower rate. You can also always look into refinancing your loans to a lower rate once you graduate, especially if you don’t anticipate needing to use one of the government assistance plans.
Check out our Repayment calculator to determine how much your monthly payments will be and how much interest you’ll owe with these new federal rates. You can also use our personalized decision tool to see which repayment plan will be best for you when you graduate.
These federal interest rate changes will go into effect for new loans starting on July 1, 2017.