How the Rise in Student Loan Rates Will Affect Borrowers

If you’re planning to take out a federal student loan to pay for college in the coming school year, you’ll see higher interest rates than in the previous year. The new rates will determine the amount you owe monthly in interest once you start repaying the loan.

The student loan interest rates kick in July 1 and are fixed, which means if you get a new federal loan for the 2017-18 school year your interest rate will stay the same through repayment. Each year Congress sets interest rates on student loans to align with the 10-year Treasury note. The new rates are tied to a Treasury note increase announced Wednesday. You can apply for a federal loan each school year by submitting the Free Application for Federal Student Aid or FAFSA.

Student loan type

Interest rate for the 2017-18 school year

Subsidized and unsubsidized direct loans (undergraduates)

4.45%

Unsubsidized direct loans (graduate students)

6.00%

Grad PLUS, Parent PLUS

7.00%

The new rates are an increase from 2016-17 rates of 3.76% for subsidized and unsubsidized direct loans for undergraduates; 5.31% for unsubsidized direct loans for graduate students; and 6.31% for PLUS loans. The last federal student loan increase was in 2014, when rates for undergraduate students rose from 3.86% for the 2013-14 school year to 4.66% for the 2014-15 school year. Rates were 6.8% for undergraduates between 2006 and 2008, the highest in recent memory. Those borrowers may now benefit from student loan refinancing to get a lower rate. Keep in mind though that borrowers who refinance federal loans lose federal perks including access to income-driven repayment plans and forgiveness programs.

» MORE: How to pay for college

Calculating your monthly payments

You can use the new rates — or the rates you previously borrowed at — to calculate what your monthly student loan payments will be after graduation. Use a student loan calculator to find the amount based on the loan size, interest rate and term length. If you’re getting a federal loan, the standard repayment term is 10 years. If you have difficulty repaying your loan after graduation, you can enroll in an income-driven repayment plan to lower your monthly payment and extend your repayment term.

If you take out a standard 10-year loan for $25,000 with a 4.45% interest rate (the new 2017-18 rate for undergraduates), you will pay $258.49 per month and $6,019.27 in total interest over the life of the loan. That’s less than an undergraduate who borrowed the same amount in 2007 paid at the then-federal interest rate of 6.8%: $287.70 per month and a total of $9,524 in interest over 10 years.

Federal loan rates vs. private loan rates

Federal student loan interest rates tend to be lower than the rates you’ll get with private lenders. Generally, you should use grants and scholarships as well as savings first, then max out your federal loans before turning to private loans. Private loans don’t offer certain protections or loan forgiveness opportunities that federal loans do. However, if you or your co-signer have excellent credit, your interest rate could be lower on a private loan. Private loans with variable rates are subject to increase in the event of a rate hike by the London Interbank Offered Rate, which private loan rates are usually based on. If you do decide to get a private loan, compare offers from several lenders before deciding.

Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski

The article How Rise in Student Loan Rates Will Affect Borrowers originally appeared on NerdWallet.

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