Future student loan interest rates could be determined by the Treasury auction – here's how

Federal student loan interest rates could increase significantly

This week's Treasury auction will play a role in determining next year's federal student loan rates. (iStock)

The Treasury Department’s bond auction that started Wednesday will determine the new interest rate on federal student loans for next year.

Federal student loan rates are likely to rise significantly because of the notable increase that bond yields have seen this year. The 10-year Treasury note auctions are usually held in February, May, August and November. 

The Department of Education has suspended loan payments and set the interest rate to 0% through Aug. 31. 

Outside of forbearance plans, direct subsidized loans and direct unsubsidized loans for undergraduates are set at 3.73%. Direct unsubsidized graduate or professional loans are set at 5.28% and direct PLUS loans for parents and graduate or professional students are set to 6.28%.

These rates could rise significantly for loans created after July 1, 2022, and will apply to new federal student loans but not private student loans. If you're interested in borrowing private student loans, you can visit Credible to find your personalized interest rate without affecting your credit score.


Fed rate hikes to push interest rates higher

The Federal Reserve raised interest rates in May by 50 basis points to a targeted range of 0.75% to 1%.

"Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong," the Fed said in its post-meeting statement. "Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures."

The rate hike came as inflation rose 8.3% annually in April, remaining near a 40-year high, according to the Bureau of Labor Statistics (BLS). As a result, the Fed is likely to continue raising rates in order to bring inflation back down. 

If you want to take advantage of rates before they increase, you could consider refinancing your private student loans to save money on your monthly payments and over the life of the loan. Visit Credible to compare multiple student loan lenders at once and choose the one with the best interest rate for you.


Interest rates to continue rising

The federal student loans interest rate is calculated by adding the yield on the 10-year Treasury note from the May auction to a premium set by Congress of 2.05 percentage points. Last year, the May auction resulted in 10-year yields of 1.684%. 

This week's Treasury auction will likely send student loan interest rates significantly higher due to this year’s rising bond rates. Interest rates for other financial products such as mortgages, personal loans and even credit cards will also likely rise since the Federal Reserve is expected to raise rates several more times in 2022 and 2023.

While private student loans won’t be impacted by the Treasury auction, they could move higher due to the Fed’s rate hikes. If you want to take advantage of the current interest rates, you could consider refinancing your private student loans. To see if this is the right option for you, contact Credible to speak to a student loan expert and get all of your questions answered.

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