Good news on college costs: Student loan rates to drop soon

(Bloomberg) — In a rare bit of good news for students facing hefty college bills, interest rates on federal student loans are expected to head lower soon.

 

Rates on U.S. student loans are on track to drop by half a percentage point for the upcoming academic year when they are reset in July.

 

As tuition prices escalate, borrowers have racked up $1.2 trillion in student debt, mostly in federal loans.

 

The expected reset would mean a college student with the average $28,000 in federal loans could save about $1,400 over 10 years in the most popular loan program for undergraduates, called the Stafford, assuming rates stay constant. Currently, borrowers pay 4.66 percent annually.

 

“It’s a lucky time to get a student loan,” said Ward McCarthy, chief financial economist at Jefferies & Co. “Historically, these rates are extremely low.”

 

The shift won’t help students saddled with older loans that have fixed interest rates as high as 8.5 percent. Since last June, U.S. Senate Democrats, led by Elizabeth Warren of Massachusetts, have unsuccessfully tried twice to pass bills letting student-loan borrowers refinance their existing loan balances at lower interest rates.

 

Congress sets the interest rates on student loans each year, based on the yield of the 10-year Treasury note yield at its May auction.

 

The yield was 2.19 percent on Tuesday, 0.42 percentage point lower than the rate at the government’s auction a year ago, suggesting that student-loan rates will fall by about that amount. Rates for this academic year can be as high as 7.21 percent for certain graduate-school loans.

 

Of course, there’s a flip side to an interest rate decline, according David Bergeron, a former Education Department official. Families who are socking away money for college in bonds and certificates of deposit are out of luck, since they aren’t getting much of a return on their money.

 

“If you’re saving for college, this makes it harder,” said Bergeron, now a vice president at the Center for American Progress, a Washington-based policy research group.