Economy

Here's Why Your Student Loan is About to Get More Expensive

June 26th 2017

By:
Danielle DeCourcey

Starting July 1, the interest rates on federal undergraduate and graduate loans are scheduled to increase.  

New loans for undergraduates taken out between July 1, 2017 and June 30, 2018 will have interest rates of 4.45 percent, up from 3.76 percent, according to CNBC. Direct unsubsidized loans for graduate students will carry a 6 percent interest rate, up from 5.31 and direct PLUS loans, utilized by graduate students and that parents of undergraduates, will rise from 6.31 percent to 7 percent. 

Is the increase significant?

Over the the length of a repayment period, the new rates could equal thousands of dollars. 

 "The people who are going to be hurt the most are current students who are getting their first loans or students still trying to finish their education," Cody Hounanian, the Program Director at Student Debt Crisis, told ATTN. "This may make it harder for them to finish their education." 

Over a standard repayment period of 10 years, with the 4.45 interest rate, an undergraduate student who took out $25,000 in federal loans would end up paying more than $6,000 in interest. That's an increase of $1000, from what they would pay under the current 3.76 interest rate. This calculator from NerdWallet allows you to plug in your information to show how the new interest rates will make your total balance shoot up: 

NerdWallet's student loan interest calculator.

The student loan landscape has recently become more difficult for borrowers, as the Department of Education rolled back Obama-era protections for defaulted borrowers against collections agencies in March. In April, Education Secretary Betsy DeVos sent a memo rescinding scheduled Obama-era reforms to the borrower system.   

How much is the federal government making from student loan borrowers? 

money

There has been some debate on how much the federal government is profiting off of student loan interest.

Sen. Elizabeth Warren (D-Mass.) has repeatedly spoken out against the "obscene" phenomenon of the federal government making money from student loan borrowers. "Right now, the United States government is making huge profits off the backs of our students," she told ProPublica in 2014.

"Our young people not only have to pay back the cost of the loans, they have to pay billions more in interest to the government — like an extra tax for trying to get an education. That's just wrong," she said. 

The numbers from the Congressional Budget Office can tell a different story depending on how the math is done. Conservatives tend to use fair value accounting to evaluate the revenue of federal student loans, which accounts for risks to businesses. This method can actually be used to show that the federal government loses money on federal student loans. However, as Warren pointed out to former Daily Show host John Stewart in 2015, the government cannot be evaluated the same way as a business. 

"...the government is not private company," Warren told Stewart. "It doesn't get the same kind of risk ratio."

handful-of-cash

 Hounanian acknowledged that while there is debate about the math, the government does make money from student loans. 

"I certainly agree that the government does make a hefty profit from the student loan system," he said. He added that the federal government is also allowing giant private companies that administer loans to profit from students. 

"There's some disagreements about math but I don't think anyone can disagree that student loan companies like Navient and Sallie Mae are making profits off the backs of students," he said. 

Hounanian wants to see fixed interest rates for new borrowers, not rates that can fluctuate each school year, so that student loan borrowers can have a better idea of what they're going to pay. He said the increasing rates send a message about the value of education in the U.S. 

"I think generally one big problem is the message that this sends." he said. "What are we telling students and parents about the affordability of college when we're facing one increase this year and probably another next year?" 

RELATED: What Actually Happens When You Default on Your Student Loans