As fine art brings varying interpretations of the meaning of what is seen, over time it would seem that student loan interest rates are perceived similarly. Across the decades, we have observed that at one point interest rates for student loans are thought to be best when set at a fixed rate. At other times we have seen the rates to be determined based upon a variable rate that is tied to other instruments such as the Treasury bills that change annually. Of note is that after the “dot-com bubble” episode in our nation’s economic history, viewers of the artful interest rate calculations began seeing it through a different lens and felt that such a calculated rate was no longer a thing of beauty, but rather an atrocity. So, the canvas for the fixed rate calculation was placed on the easel. In 2002, after much artful critique by student interest groups and the public at large, the gallery owners felt it was time to rotate to a new display, thereby bringing to light the Higher Education Act Amendments of 2002 that painted the fixed rate structure that became effective with the season of the 2006-2007 award year. Then, with further rearrangement of the displayed artwork by the curators in the College Cost Reduction and Access Act of 2007, we experienced the rate for certain loans being set as a fixed rate, even though that rate decreased in each successive year, only to rise again at the end of a defined period of time. This display of interest rates has been showing for the past five years. However, yet again the Federal Direct Student Loan interest rates have recently been observed through a lens akin to the one in the late 1990s and early 2000s and once more created a longing for a similar artistic production of interest rate calculations as then. This has resulted in a variable fixed interest rate creation. As such, we see that the beauty of the structure truly lies in the eyes of the beholder. No one knows how it will be perceived by future individuals viewing the rates currently on display.
But, here we are where the current beauty being beheld is the interest rate prescribed in the Bipartisan Student Loan Certainty Act of 2013. It was signed into law on August 9, 2013. Nevertheless, the new interest rate structure is applied retroactively to all Federal Direct Loans with a first disbursement on or after July 1, 2013.
The newly released work of art determines the interest rate structure by using the following formulas:
- Undergraduate Stafford loans (subsidized and unsubsidized): 10-year Treasury note plus 2.05 percent, capped at 8.25 percent.
- Graduate Stafford loans: 10-year Treasury note plus 3.6 percent, capped at 9.5 percent.
- PLUS loans (graduate and parent): 10-year Treasury note plus 4.6 percent, capped at 10.5 percent.
It is important to note that there is no longer a difference in the interest rates for undergraduate subsidized and unsubsidized Direct Loans as there has been since 2008. The interest rate for both subsidized and unsubsidized loans for undergraduate borrowers will be the same going forward.
Also, of interest (no pun intended) is that the new rates are tied to the 10-year Treasury note for the first time in history. In previous renditions of this artful display of rate calculations, the values were tied to the 91-day Treasury bill.
Since these rates are tied to the 10-year Treasury note, the interest rates will change annually, and thus, there is variableness to the rates. But, significantly, the rate on a particular loan once disbursed will remain fixed for the life of that loan. Therefore, students that borrow in more than one award year will have loans at varying rates that are each fixed for the life of the loan.
Current forecasts for the 10-year Treasury note are highlighted below. These are the rates that were used in determining the cost and budget savings over a 10-year period. It must be kept in mind that these forecasts for future years’ Treasury note yields depend upon numerous factors in the economy and may vary from what has currently been forecast (other than for 2013 which is now actual and are what was used to set the 2013-2014 interest rates). The current forecasts for “the high yield of the 10-year Treasury note auctioned at the final auction held prior to” June 1 preceding the July 1 start date of the new award year are:
2013 – 1.81 percent
2014 – 2.6 percent
2015 – 3.45 percent
2016 – 4.2 percent
2017 – 4.95 percent
2018 through 2023 – 5.2 percent
With these forecasts, we can see that the following interest rates are in effect for 2013-2014:
- Undergraduate Direct Loans (Subsidized and Unsubsidized) 1.81 percent Treasury note yield + 2.05 percent = 3.86%
- Graduate Direct Loans (Subsidized and Unsubsidized) 1.81 percent Treasury note yield + 3.6 percent = 5.41%
- PLUS Loans (graduate and parent borrowers) 1.81 percent Treasury note yield + 4.6 percent = 6.41%
Portrayed graphically, the 2013-2014 rates will look like this:
