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The fact that there are federal student aid programs available in the United States through the U.S. Department of Education (ED) enables more students access to a postsecondary education. In the mix of aid programs available are, of course, federal student loans. Naturally, it is true that no one likes to pay interest. But, if it is a student loan, there will be interest charged and such interest will accrue on those loans.
At present, interest is collected on student loans as the borrowers pay their education related costs over time. The interest paid toward the Federal Direct Loans (DLs), of course, is factored in to making the federal budget work. Accordingly, the federal budget thanks borrowers for their interest, even if they never say so.
As a reminder, the interest rate for all loans made after July 1, 2013, is set at a fixed rate. This rate structure was implemented with the Bipartisan Student Loan Certainty Act of 2013, which overhauled the Federal Direct Student Loan Programs’ interest rate structure. The result of that Act is that interest rates are now determined based upon the high yield of the last auction of the 10-year Treasury notes held prior to June 1 each year.
To calculate the interest rates, the formula goes like this:
the yield (called the “index”)
+ a margin (or, what is called an “add on”) that is attached to the index
= the final interest rate for loans made in the new award year
The rates for the Subsidized and Unsubsidized Direct Loans to undergraduate students are at equal interest rates based upon this statutory formula. The law calculates the interest differently for Direct Unsubsidized Loans for graduate/professional level students, as well as for Graduate PLUS Loans and Parent PLUS Loans (loans to parents of dependent undergraduate students). The result is that the separate categories of loans carry their own specific rate.
The rate is applicable to all loans taken out during an award year. That is, all loans of the same type that are disbursed from July 1 of one calendar year through June 30 of the next calendar year are all made with the same interest rate. Nevertheless, due to an ever changing economy, loans borrowed in each award year will likely have a different interest rate than that of the prior year and each subsequent year. The loans to be borrowed (disbursed) in the award year of July 1, 2019, through June 30, 2020, are no exception. Note that the interest rate is lower for 2019-2020 by just over one-half percent (52 “basis points,” in finance lingo).
The last auction of the 10-year Treasury note prior to June 1 this year was held on May 8, 2019. The high yield at that auction was 2.479%.[1] That yield rate is used to determine the rates on new loans first disbursed on or after July 1, 2019.
The U.S. Department of Education (ED) announced the interest rates for loans to be disbursed on or after July 1, 2019, but before July 1, 2020, in an Electronic Announcement on May 23, 2019.[2] Consequently, the interest rates for such new loans to be first disbursed on or after July 1, 2019, but before July 1, 2020, will be as shown in the chart below. The interest rate on these loans is fixed at the rate that is valid when a loan is first disbursed and, therefore applies to that loan for the life of the loan.
(Source: Adapted from the US Department of Education’s Electronic Announcement dated May 23, 2019.)
Again, the rates in the chart are a fixed rate for any loan made (i.e., first disbursed) during the time period beginning with a disbursement on or after July 1, 2019, and before July 1, 2020. Students with loans prior to this period may have different rates on such former loans, just as will borrowers, in all likelihood, who take out loans after this defined 2019-2020 award year period.
Importantly, absent in the chart is any indication of rates for Federal Direct Consolidation Loans. Any Direct Consolidation Loan (DCL) application that is received on or after July 1, 2013, has the rate calculated based upon a weighted average of the interest rates of the loans being consolidated, rounded up to the nearest 1/8 of one percent. Therefore, Direct Consolidation Loans are not covered, specifically, by the interest rate structure highlighted in the chart above. Rather, the DCL interest rate is affected by the effect the individual loans’ rates have on determining the weighted average rate of the loans being consolidated. This, thereby, impacts the new DCL’s interest rate. Of note, also, is that DCLs do not have a cap or maximum on their interest rates. Rather, as stated, the rates on DCLs are calculated based upon the weighted average of the loans consolidated.
Further, it is important to keep in mind that for students who borrowed prior to July 1, 2013, the interest rate structure was different. So, if you have a student who borrowed previous to July 1, 2013, who is returning for further education now, she or he may have prior loans with an interest rate calculated on a different basis as was specified by the law at that time. Borrowers who obtained loans under the former Federal Family Education Loan Program (FFELP), with loans disbursed prior to June 30, 2010, may have various loans using a number of different formulas. (Typically, ED publishes a chart of such prior FFELP loan interest rates that are currently applicable.)
So, what is the takeaway? The news is favorable for student loan borrowers this year with the resulting lower interest rates! But, as always, while student loans may be a useful tool to assist in paying for higher education costs, borrowers should use discretion when deciding an amount to borrow so they avoid paying more interest than necessary over the life of a loan.
Also, financial aid administrators are now able to effectively counsel students as they are receiving and accepting notifications of aid eligibility Such counseling of loan terms and rates is one of many of aid administrators’ responsibilities. With such appropriate counseling, perhaps students will gain an appreciation for the student loans received, even though the “Thank you for your (student loan) interest” may never be heard.
[1] Treasury News, U.S. Department of the Treasury, May 08, 2019, at
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/R_20190508_1.pdf
[2] Electronic Announcement, U.S. Department of Education, May 23, 2019, at
https://ifap.ed.gov/eannouncements/052319InterRates4DLFirstDisb070119and063020.html
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This material is presented for informational and educational purposes only and should not be considered to be giving legal advice.
