Student Loans Just Got a Lot More Expensive for Our Snowflakes

Snowflakes looking to take out massive student loans for next year to fund the $50,000 price tag of their liberal bastion of choice, and maybe the occasional binge-drinking trip to Cancun for Spring Break, are about to get a little price hike.  But, don’t worry, you won’t have to start paying on those loans for at least 4 years.

Beginning in July, interest rates on new federal student loans are set to rise by 0.69%, per data published by the Treasury, which would drive the interest cost of new undergraduate loans up to 4.45% from 3.76% for the academic year ending in June, a nearly 20% increase off an historically low base. Meanwhile, rates on some graduate loans are set to rise from 5.31% to 6% and rates on loans to parents and guardians are due to jump from 6.31% to 7%.  As an example, the cost of a $10,000 loan would increase by about $400, according to an online calculator maintained by Bankrate.com.

Of course, these higher borrowing costs shouldn’t be that big of a deal as some 44 million Americans only owe $1.4 trillion on their student loans, or a modest average of only $32,000 per borrower. 

As Bloomberg points out, the Obama administration changed the methodology for calculating student loan rates in 2013 to link them to then sinking 10-year Treasury rates.  And while that helped to lower rates for students for the past several years, now that the Fed is in rate-hiking mode, it’s having the opposite effect.

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. They moved 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.

But snowflakes shouldn’t worry too much, as we pointed out before (see “Obama Student Loan Foregiveness Plan To Cost Taxpayers $137 Billion, GAO Finds“), the GAO currently estimates that taxpayers will ultimately have to cover $137 billion of their student loans outstanding…an obligation we’re certain will only grow over time.