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Student loans to cost more this fall

Posted at 7:08 PM, May 07, 2014
and last updated 2014-05-07 19:08:39-04

WASHINGTON (CNNMoney) — Subsidized student loans will get pricier this fall, thanks to Congress.

Students taking out government student loans could pay nearly a percentage point more in interest rates. The exact rate will be set Wednesday, based on a government bond auction.

For seniors, with only one year of college left, it won’t hurt as much. If they take out the maximum government student loans available for a year of $5,500, it could mean an additional $260 in interest payments over a 10-year period.

Freshmen, with at least four years of college ahead of them, will hurt more. They could pay an additional $1,650 over the life of the loans, according to the Institute for College Access & Success. The analysis is based on April estimates by the Congressional Budget Office.

Rates are expected to climb even higher in coming years.

It’s a contentious issue, especially since student loan debt has skyrocketed in recent years.

Delinquent payments have also soared, making it a pressing political and financial issue for millions of Americans.

Many students graduate from college deep in debt and without jobs. It is second only to mortgages as the largest debt that consumers carry. In 2012, students on average owed nearly $29,400 in loans.

Last fall, subsidized loan rates were slated to double to 6.8% for undergraduates but Congress intervened with a new formula that kept rates low for 2013 but allowed them to rise with the markets.

Interest rates for all consumer loans have been low in recent years because the Federal Reserve has been buying Treasury bonds in a bid to keep interest rates low and help economic growth.

But as the Fed backs off its monthly bond purchases, interest rates are expected to creep up for all loans.

“Interest rates are rising and they’re going to continue to rise as the Federal Reserve backs off (economic stimulus),” said Mark Kantrowitz, senior vice president at Edvisors Network, which provides advice on college scholarships and student loans.

Student loan rates starting Wednesday will be based on a 10-year U.S. Treasury note auction. The rate will be set at the note’s yield, plus an additional 2.05% for undergraduates.

Graduate students pay 3.6% over the 10-year Treasury. Rates are capped for undergraduate loans at 8.25% and for graduates at 9.5%.