Are Cheaper Rates for Federal Student Loans on Tap? Hurry While Supplies Last

NEW YORK (MainStreet) — The word in some circles is that Christmas may come in July this year for people with Federal student loans--when interest rates on Stafford loans may go down.

Bloomberg and other sources reported last week that "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.”

That expected reset, Bloomberg said, "would mean a college student with the average $28,000 in federal loans could save about $800 over ten years on Stafford loans for undergrad, assuming rates stay constant," citing a government financial-aid calculator.

The problem is that they are very unlikely to stay constant. During the summer of 2013, Stafford loan rates were set to double from 3.4% to 6.8% when a 2007 law that reduced subsidized Stafford loan rates was set to expire. Congress settled on 3.86% that July, but it was a temporary fix in a rising rate environment. Subsidized Stafford loan rates are low, but have already risen about 80 basis points to 4.66% since 2013.

Congress sets interest rates on student loans annually, based on the 10-year Treasury note yield at its May auction. The yield was 2.19% last Tuesday, 0.42% less than the rate at the government’s auction last year--about half a percentage point. Stafford rates could drop by about that much. Rates for Parent PLUS and some grad school loans could go beyond 7.21%.

So would a rate decrease be an anomaly or evidence of a real trend that people can hang their hats on?

Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a Las Vegas-based company that provides advice about student loans, thinks it’s an anomaly, while pointing out that the Federal Reserve has not yet raised interest rates.

"It is possible that the Federal Reserve factors the May basis for new student loan interest rates into its considerations of whether and when to raise interest rates, now that student loans are a macroeconomic factor," he said. The fact that they have become one is evidence of their influence.

”Total student loan payments represent about 0.4% of GDP, sufficient for them to be considered a weakly macroeconomic factor,” he said. He also pointed out that "the total number of borrowers with outstanding student loan debt is 41 million, more than 10% of the U.S. population." That includes those under 18, some 24% of the population according to the U.S. Census Bureau, who wouldn’t be looking for student loans. If those under 18 were stripped out, the percentage of Americans with student loans would be higher.

The Jobs Report on Friday revealed that 223,00 new ones were added in April, the kind of indicator that may presage a rate hike. But wages are nearly stagnant, growing at a historically slow rate of just over 2% a year. The shrinking labor force and weak corporate earnings are grist for the argument that robust economic growth isn’t just around the corner. If the Fed stands pat, students can expect that the day of interest rate reckoning on federal loans will be deferred--for another year.

--Written by John Sandman for MainStreet

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