Interest Rates on Student Loans Will Drop

Interest rates on more than $120 billion of federal guaranteed student loans will drop about half a percentage point July 1, saving the average borrower $60 the coming year.

The lower rate, which also applies to new loans, is based on the decline at the Treasury’s three-month bill auction in late May to 4.621% from 5.155% a year earlier. Loan rates are set at 2.3 percentage points above the Treasury bill benchmark and change annually.

For subsidized student loans, where the government pays the interest on the loan while the borrower is in school, the effective interest cost falls to about 3.32%, accounting for interest tax deductions, according to the Coalition for Student Loan Reform.

“When you factor in tax deductibility and other government benefits on the loans, especially the subsidized loans, it is one of the cheapest forms of credit around anywhere,” said Mark Cannon, executive director of the coalition.

The $60 savings from the new loan rate of 6.92% is based on the average loan of about $12,000 for undergraduates.

Treasury bill yields are lower than a year ago because the Federal Reserve cut short-term interest rates three times from September to November.

About $33.2 billion of new federal-backed student loans were issued last year, up 2% from 1997.