NAICU Washington Update

Student Loan Interest Rates to Rise in 2014

May 19, 2014

Next year, interest rates for new federal student loans for undergraduates will rise .80% to 4.66%. Based on the change, a borrower will pay an estimated $50 more per year on a $10,000 loan. Rates on loans taken out by graduate students and PLUS loans will also increase. (See summary chart below.)

The annual interest rate for all federal student loans is determined by adding a fixed percentage (2.05% in the case of undergraduate loans) to the current Treasury bill rate. This is a result of a Congressional compromise reached in the summer of 2013 to prevent the interest rates for subsidized loans for undergraduates from doubling.

Two changes determined the increase in the interest rate:

  1. Beginning July 1, 2014, the student loan interest rates for AY 2014-2015 will be pegged to the 10-year Treasury bill rate of 2.61%. Last year, the T-bill rate used was very low (1.81%), thus so were the interest rates for federal student loans. While the annual rate changes, it can’t exceed 8.25% for subsidized and unsubsidized undergraduate loans no matter what the T-bill rate is. In addition, the rate on a disbursed loan is maintained for its life. Consequently, because borrowers get new loans each year, they are likely to have multiple loans with different interest rates.

    In addition to new federal undergraduate student loans, the rates for Stafford loans for graduate students and PLUS loans will also be increasing. The rates for graduate student Stafford loans will be 6.21%, up from 5.41%, while the rate for PLUS loans, both Parent PLUS and Grad PLUS, will increase from 6.41% to 7.21%.

    Prior to the change linking the interest rate to the ten-year T-bill, the rates were 3.4 % for subsidized undergraduate loans, 6.8% for undergraduate and graduate unsubsidized loans, and 7.9% for PLUS Loans.
  2. In addition to interest, all federal student loans carry origination fees. Because of sequestration, the origination fees will increase by a small amount on October 1, 2014. Fees for Direct Subsidized and Unsubsidized Loans will be 1.073% and 4.292% for PLUS loans.

Sen. Elizabeth Warren (D-MA) is expected to introduce a bill that would enable borrowers to refinance older federal and private loans carrying higher interest rates at current, AY 2013-2014, interest rates.

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