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June 10, 2014

Federal student loan rates reset for 2014-2015

The U.S. Treasury Department recently announced the outcome of its latest auction of 10-year notes.

The government agency attained a median yield of 2.585 percent through this sale. The low yield on these securities sales was 2.510 percent, and the high yield was 2.612 percent.

Market participants can leverage this information to determine what interest rates will be on student loans taken out for the 2014-2015 academic year.

Student loan rates decline in AY 2014-2015
For this school year, undergraduate Stafford loans will have a 4.66 percent interest rate, compared to 3.86 percent in the prior period, wrote Clare McCann, a policy analyst for the Education Policy Program at the New America Foundation. Other student loan types will also move higher, including:

Grad PLUS and Parent PLUS loans, which will rise to 7.21 percent from 6.41 percent

Graduate Unsubsidized Stafford Loans, which will reach 6.21 percent from 5.41 percent

Borrowing costs lower than predictions
These borrowing costs are more favorable than those that existed in recent years, and are lower than the rates Ed Central predicted earlier this year. At the time, the organization forecast that undergraduate Stafford loans would have an interest rate of 4.75 percent.

Ed Central noted that before the federal government established a new formula for determining borrowing costs, borrowers paid 6.8 percent interest on their Unsubsidized Stafford loans. The loans had higher borrowing costs since the federal government provided different rates for subsidized and unsubsidized Stafford loans prior to the 2013-2014 academic year.

How rate increase will impact students
It is worth noting that while student loan rates are rising for the 2014-2015 academic year, these borrowing costs are still lower than they were two years ago. As a result, the impact on students will be less pronounced than it could be.

Another variable to consider is the rising prominence of P2P lenders, which can have a very disruptive effect on the credit markets.

Many of these platforms are targeting the best student loan borrowers, and enticing them to refinance their federal loans through an offer of lower rates.