Being informed about the costs of taking loans before signing the promissory note is prudent, especially with rising college tuition and average student loan balances totaling $30,000+ for Class of 2017 graduates.
However, college students don’t know the exact student loan interest rates before enrolling in the new school year. Federal educational loan interest rates are set each year in June, but, May 1 is the national deadline for incoming freshmen to submit their intent to enroll, and fall class registration takes place before June 1.
Each school year, Federal Student Loan interest rates are equal to the 10 Year Treasury Note Yield (at the Treasury auction immediately prior to June 1), plus 2.05%, not to exceed 8.25%, and are reset each new school year. [The 10 year Treasury Note Yield is the amount the Federal government pays to borrow money for 10 years.] Estimates for 2017-18 Federal Stafford Loans (i.e. Federal Student Loans) is 4.56%, as of March 15, 2017.
Since interest can add to the overall costs of a student loan, students are wise to estimate potential interest rates, as well as calculate the total interest costs to be paid over the life of the loan—typically a 10 year repayment term. Then, students can understand the affordability of the loan, plus the financial obligation they’ll be assuming for the next 10-15 years of their lives.
Note: as of July 1, 2016, current interest rates for the 2016-17 school year are 3.76% for both subsidized and unsubsidized Federal student loans, while parent PLUS loans have a 6.31% interest rate.
Source: Bipartisan Student Loan Certainty Act of 2013 (H.R. 1911)
