May 7 (Bloomberg) -- Students will pay more to borrow from the U.S. government for college costs this coming school year, with the interest rate on undergraduate Stafford loans climbing to 4.66 percent.
Interest rates for most federal student loans are pegged to the yield on the U.S. 10-year note sold at the Treasury’s auction prior to June 1. This year’s sale was held today, with the yield on the note set at 2.61 percent.
When Congress first tied student loans to the Treasury note last year, undergraduate Stafford loans, the most-widely borrowed, carried a rate of 3.86 percent, almost 3 percentage points less than in the two previous years, because the 10-year note yield was a low 1.81 percent. The yield had been driven down by Federal Reserve purchases of the note to keep borrowing costs down and stimulate the economy.
“It was a given that they’d start increasing,” said Mark Kantrowitz, publisher of Edvisors Network Inc., a Las Vegas-based operator of college financial-aid websites. Treasury yields “had nowhere to go but up.”
The rate increase means undergraduate Stafford borrowers will pay about $46 more per year for each $10,000 borrowed based on a 10-year repayment period, compared with the current year’s rate. Interest rates are fixed for the life of federal education loans, though students take out a separate loan for each school year.
Students are borrowing more to pay for college as the cost increases and outstanding education debt is about $1.2 trillion. Graduates of the class of 2012 who took out loans owed an average of $29,400, according to The Institute for College Access & Success, an Oakland, California-based nonprofit group. Seventy-one percent of college seniors had student loan debt.
For the year beginning in July, graduate Stafford loan rates will rise to 6.21 percent from 5.41 percent in 2013-2014. PLUS loans for graduate students or for parents paying their undergraduate children’s college costs will increase to 7.21 percent from 6.41 percent. Inflation in the U.S. rose at a 1.5 percent pace in the 12 months through March.
The rates are determined by adding 2.05 percentage points to the 10-year Treasury rate for undergraduate Stafford loans. For graduate Staffords, 3.6 percentage points are added to the base; and for PLUS loans, it’s an additional 4.6 points.
Congress last year agreed to cap education loan rates at 8.25 percent for undergraduate Stafford loans, 9.5 percent for graduate Stafford loans and 10.5 percent for PLUS loans.
U.S. Senator Elizabeth Warren, a Democrat from Massachusetts, introduced a proposal yesterday that would let student-loan borrowers with high interest rates refinance their debt at today’s rates.
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