U.S. college graduates repaying federally backed education loans will be charged 7.14 percent beginning in July.
The annual rate increases, set by Tuesday’s Treasury auction, are among several changes facing U.S. college students with loans. Congress voted this year to eliminate the variable structure, setting a fixed 6.8 percent rate for all new loans.
For most students, the new rates on existing loans and the vote by Congress on future loans mean that college will become even more expensive, said Joanna Acocella, executive vice president of government relations at College Loan Corp., a San Diego-based lender.
“There’s a number of these provisions that students and their families really need to look at, because they will impact the cost of college for the average family,” Acocella said in an interview.
The interest rate charged former students, beginning six months after they finish school, was set last year at 5.3 percent. The rate for students currently in school was set Tuesday at 6.54 percent, up from 4.7 percent during the 2005-06 school year.
The rates are adjusted annually based on the cost of three- month Treasury bills in the final auction of May, which was held Tuesday.
The rate increases are driven by Federal Reserve policymakers, who this month raised their benchmark U.S. interest rate to 5 percent, double its level 15 months earlier.
The rate increased last year for the first time since 2000-01, from a record low of 3.37 percent for 2004-05. The two increases – 1.93 percentage points last year and 1.84 points Tuesday – are the largest since the current variable structure was introduced in 1998, and just below the 2-percentage-point gain when the rate on loans in repayment rose to 9 percent in 1981 from 7 percent in 1980.
The change this year by Congress, setting the fixed 6.8 percent rate, also will eliminate the system of separate rates based on whether a student is in college or has graduated. The Treasury auction each May will, however, still set rates for old variable-rate loans that remain active.
U.S. college graduates face an average debt of $20,500, according to the College Loan Corp. A student facing a monthly rate of $221 at the 5.3 percent rate would pay $240 at the 7.14 percent rate, it said.
A nationwide survey last week found college graduates with debt reporting problems meeting daily financial needs. The poll by AllianceBernstein Investments Inc. found 42 percent described themselves as “living paycheck to paycheck,” while only 24 percent of those who graduated without debt described themselves that way.
