July is here, which brings an important development to student borrowers: Higher interest rates for education loans kick in today. Loans for undergraduates will increase to 4.66 percent, from 3.86 percent, for all new borrowing during the 2014-15 school year. (Loans that students already took out aren’t affected by the hike.)
Historically, Congress set a fixed rate for students loans. It was lowered to 3.4 percent during the financial crisis. Last summer, that temporary reduction was set to expire, which would have caused the rates to double to 6.8 percent. A last-minute deal pegged the rates to the government’s borrowing costs, which are at historic lows.
The roughly seven out of 10 college seniors who borrow to attend school graduate with about $29,400 in loans on average (PDF). If the 2014-15 rate increase were applied to the full debt, the average monthly payment would go up about $10 a month—an amount that won’t make or break many borrowers. Over 10 years, the increase could add about $1,350 in interest expenses.
In recent years, the increased income graduates earn has generally kept up with rising student loan payments. Borrowers whose monthly loan expenses are out of whack with what they earn also have additional back-up repayment options. Whether the overall affordability will hold up depends on a number things, including how much and how quickly rates rise. Congress’s cap on undergrad student loans stands at 8.25 percent. Given the average debt in the example above, rates at that level would add about $65 a month in payments—almost $14,000 over a loan’s duration.