Interest rates on Federal Stafford Loans are fixed. The current interest rates for new Federal Stafford Loans in 2015-2016 are 4.29% for undergraduate students and 5.84% for graduate and professional students.
Interest rates are the same for subsidized and unsubsidized Federal Stafford Loans. Note that since the federal government pays the interest on subsidized Federal Stafford Loans while the borrower is enrolled in school on at least a half-time basis, the subsidized Federal Stafford Loan provides the borrower with the equivalent of a 0% interest rate during the in-school period, making it less expensive than the unsubsidized Federal Stafford Loan.
On August 9, 2013 President Obama signed the Bipartisan Student Loan Certainty Act of 2013 (P.L. 113-28), changing how student loan interest rates are determined. The bill links interest rates on new federal education loans made on or after July 1, 2013 to the 10-year Treasury rate, plus a fixed margin. The interest rates on Federal Stafford loans are capped at 8.25% and 9.5% for undergraduate and graduate/professional students, respectively. The interest rates on new loans are still fixed for the life of the loan; however, each year’s new loans will have different fixed rates, based on current market rates.
|Graduate and Professional|
Before 2006-2007, interest rates on Federal Stafford Loans were variable, with different rates depending on whether the borrower was in the in-school and grace periods or in the repayment period. (In 1993-1994 and earlier award years, the interest rates were the same for the in-school, grace and repayment periods.) Interest rates during the repayment period were 0.60% higher. Borrowers could lock in the current rate (rounded to the nearest 1/8th of a percentage point) by consolidating the loans. Interest rates were the same for undergraduate, graduate and professional students. Interest rates were also the same for subsidized and unsubsidized Federal Stafford Loans. The next table shows the variable interest rates on the Federal Stafford Loans in effect at the time the loans were disbursed.
|Academic Year||In-School and Grace Periods||Repayment Period|
Fees on Federal Stafford Loans are 1.073% for loans disbursed from 10/1/2014 to 9/30/2015 and 1.068% for loans disbursed from 10/1/2015 to 9/30/2016.
||Total Loan Fees|
|2015-2016 (10/1/15 - 9/30/16)||1.068%|
|2014-2015 (10/1/14 - 9/30/15)||1.073%|
|2014-2015 (7/1/14 - 9/30/14)||1.072%|
|2013-2014 (12/1/13 - 6/30/14)||1.072%|
|2013-2014 (7/1/13 - 11/30/13)||1.051%|
|2005-2006 and before||4.0%|
Loan disbursement and default fees are effectively a form of up-front interest. Assuming a 10-year repayment term, a 4% fee is the equivalent of an increase in the interest rate of about seven-eighths to one percentage point. Assuming a 30-year repayment term, a 4% fee is the equivalent of an increase in the interest rate of about one-third to half a percentage point. The relative impact of a fee is greater with a shorter repayment term or if the borrower prepays the loan, since the fee will be amortized over less time. This is why borrowers who plan to pay off a loan early may wish to avoid up-front fees, if possible.
Up to $2,500 total in interest on federal and private student loans may be deducted on the borrower’s federal income tax return each year. The deduction occurs as an above-the-line exclusion from income and so may be claimed even if the borrower doesn’t itemize deductions. This reduces the cost of the loan, the equivalent of a small reduction in the interest rate.
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