It will cost students and parents less to borrow money from the government to pay for college in the fall as interest rates on federal loans are set to drop.
Interest rates on federal student loans will be reduced by more than one-third of a percentage point as the result of the Treasury Department's auction of 10-year notes on Wednesday. The government resets rates on student loans every year based on the spring rate of the note, plus a fixed margin. New rates take effect July 1.
Undergraduate students can expect to pay 4.29 percent in interest on new Stafford loans, instead of the current 4.66 percent. A freshman taking out $5,500 for the 2015-16 academic year will save about $117.63 in interest with this new rate, assuming he repaid the debt in the standard 10 years.
Graduate students will see the interest rate on new Direct loans fall from 6.21 percent to 5.84 percent. That means someone planning to borrow $20,500 in the coming year will save about $457.44 in interest on a 10-year repayment plan.
And parents who take on federal debt to help their children pursue a bachelors, masters or Ph.D can expect to pay 6.84 percent on a PLUS loan, instead of 7.21 percent. If mom and dad take out a $10,000 loan, they could save $229.42 in interest, assuming they repaid in 10 years.
Keep in mind the rates are only good for loans taken out to pay for the 2015-16 academic year. Next July's rates could be higher.
"It's a temporary anomaly. I think interest rates are going to start going up a year from now. It's just that the Federal Reserve has been slow to increase rates," said Mark Kantrowitz, senior vice president and publisher at Edvisors Network, a collection of college-related websites. "It's a market rate and it will fluctuate."
It's been almost two years since Congress decided to tie federal student loan rates to the market, rather than setting them. At the time, lawmakers clashed over the rate-setting system that many feared would eventually lead to higher rates as the economy improved. If Congress didn't take action, the rates on undergraduate loans were going to double to 6.8 percent.
Families have benefited from historic lows on interest rates. But that could change. Rates could top 6 percent on undergraduate loans, 7.5 percent on graduate loans and 8.5 percent on PLUS loans by 2018, according to a recent projection from the Congressional Budget Office.
Congress put caps in place to prevent rates from skyrocketing. The interest on undergraduate loans can never go higher than 8.25 percent. Graduate loans are capped at 9.5 percent, while the limit on PLUS loans is 10.5 percent.
"There is nothing to stop rates from approaching those caps at any point," said Lauren Asher, president of the Institute for College Access & Success. "This is an unusually long period of unusually low rates. No one knows how much longer it will be around."