College borrowers will get a small break in the coming school year, as interest rates on new federal student loans fall slightly this summer.

Rates had risen in the last two years. But rates on federal loans taken for the next academic year will drop more than half a percentage point, said Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com.

Kantrowitz calculated the new rates using the federal government’s formula. (The Education Department has not formally announced the rates.) 

Since 2013, rates on student loans have been set by a formula based on the sale of 10-year Treasury notes each spring.

The new rates will take effect every July 1 and are fixed for the life of the loan.

Overall, Kantrowitz said, the lower rate will reduce monthly payments on new loans by just a few dollars, assuming the loans have a 10-year repayment period.

Still, given the expense of attending college, any savings are welcome. The average annual cost of a four-year private, nonprofit college — including tuition, fees, housing and meals — was about $49,000 for the 2018-2019 academic year.

“This is a bit of good news,” said Jessica Thompson, director of policy and planning at the Institute for College Access and Success.

Rates on loans for undergraduates will fall to 4.53%, down from 5.05% for the 2018-2019 academic year. Rates for graduate students will drop to 6.08% from 6.6% this year.

Rates on PLUS loans — additional federal borrowing available to parents and graduate students — will fall to 7.08% from 7.6%.

The amount of federal loans that undergraduate students can borrow is capped each year, depending on the student’s year of college. The maximum is generally $5,500 for freshmen, $6,500 for sophomores and $7,500 for juniors and seniors. The amount borrowed overall is limited to $31,000.

Students who need to borrow more may have their parents take out PLUS loans or turn to private loans made by banks and other lenders. Private loans, however, typically lack protections that come with federal loans, like the option to reduce your monthly payments to reflect your income.

When borrowers run into trouble, private lenders are not required to help them stay afloat, said Seth Frotman, executive director of the Student Borrower Protection Center, which advocates for changes in the student-loan industry.

“Private student loans should always be the very last option,” Frotman said.

Here are some questions and answers about student loans:

Q: Can I get the new, lower interest rates on student loans I have already borrowed?

A: No. The rates apply to new loans borrowed from July 1 of this year to June 30, 2020; they don’t affect the rates on loans you already have. There’s no option to refinance federal student loans to take advantage of lower rates as you would with, say, a home mortgage. You can refinance federal loans only by paying them off with a new, lower-interest loan from a private lender — which means giving up some protections.

(“Consolidating” federal student loans lets you have just one payment. The interest rate on the new loan is a weighted average of the old loans, though, so it doesn’t save any money.)

Q: Are there any fees charged for federal loans?

A: Yes. Fees are just over 1% of the amount borrowed for direct loans, and about 4.2% for PLUS Loans, for loans taken from October 2018 through Sept. 30, 2019.

Q: How should I decide how much I can safely borrow for college?

A: Just because rates have fallen doesn’t mean students should borrow the maximum amount. “I would encourage students to borrow only what they need, not what they can,” Kantrowitz said.

Financial aid experts often recommend that your total loan debt be less than your annual starting salary. Payments are considered affordable, according to Savingforcollege.com, if they are less than 10% to 15% of your monthly gross income.

Borrowers should be conservative, however, when estimating their earnings after graduation, Frotman said. Some for-profit schools, in particular, have inflated expected salaries to justify borrowing large sums to attend.

 

Ann Carrns writes for the New York Times.