The U.S. government is raising prices for new student debt, adding hundreds of dollars to the cost of the typical federal college loan.
Beginning in July, interest rates on new government loans are set to rise by 0.69 percentage point, according to Wednesday figures from the Department of the Treasury. For undergraduates, that could amount to nearly a 20% increase in interest charges.
New undergraduate loans from the Department of Education are due to carry an interest rate of 4.45%, up from 3.76% for the academic year ending in June. Rates on some graduate loans are set to rise from 5.31% to 6%, while rates on loans to parents and guardians are due to experience a jump from 6.31% to 7%. According to an online calculator maintained by Bankrate.com, the cost of a $10,000 loan would increase by about $400.
That may not seem like a lot of money, but the uptick comes on top of a mountain of student debt. After years of tuition hikes by colleges and relative decreases in U.S. grants, more students and their family members are borrowing from the government to finance higher education. As it is, some 44 million Americans collectively owe $1.4 trillion on their student loans, an average of roughly $32,000 per debtor. About one in six American adults has a student loan.
Higher costs to borrow from the U.S. government could help private lenders such as SLM Corp., more commonly known as Sallie Mae, and Discover Financial Services. Both companies lend to households seeking funds to pay for college, but the interest rates on their undergraduate loans are generally higher than those offered by the government, according to a review of their websites. Their loans — which lack the protections afforded to U.S. students with federal loans who subsequently struggle to repay their debt — could be more attractive to borrowers if their rates stay steady while the feds raise prices.
"If the government backs off any piece of that market ... we would take the position to take advantage of it," David Nelms, Discover's CEO, said during an April 25 earnings call.
The government's interest-rate increase has its roots in a 2013 provision signed into law by President Barack Obama. In that law, the Republican-led Congress and the Obama administration teamed up to change how the feds set interest rates on student loans, moving away from a system in which Congress defined interest rates years in advance to one in which rates would be tied to the U.S. government's cost of borrowing over 10 years.
By linking students' borrowing costs to those of the government, policymakers sought to create an environment in which students would benefit from low interest rates when the economy wasn't growing very much but would pay up when economic growth was accelerating and higher rates would be more affordable.
Back then, the government's economic forecasters thought interest rates on federal student loans would be much higher than they are today, given the expectation that the economy would be growing much faster than it is.