If You’re Paying for College, Watch This Week’s Treasury Auction

If You’re Paying for College, Watch This Week’s Treasury Auction



College students and their families should keep an eye on the Treasury Department’s government-bond auction this week. It could influence their finances for years to come.

The auction, scheduled for Wednesday, will be the main determinant of the interest rate on new federal student loans. Because bond yields have soared this year, that rate is likely to be much higher than the last time these student-loan rates were set a year ago.

The higher cost is an example of how a surge in interest rates is hitting every corner of the economy. The Federal Reserve has raised interest rates twice this year and is expected to keep doing so, part of its bid to rein in the highest inflation in decades. Treasury prices have slumped in response, lifting yields, which move inversely. The 10-year Treasury yield settled at 3.080% on Monday, up from 1.496% at the end of last year.

The most common kind of federal student loan, known as a direct loan, is offered at a new interest rate every July. The rate is calculated by adding the yield on the 10-year Treasury note in the May auction to a fixed premium, set by Congress, of 2.05 percentage points.

Last year, the May auction resulted in 10-year yields of 1.684%, setting a student-loan rate of 3.73% through this June. That rate could move above 5% starting in July. If the rate tops 5.05%, it would be the highest since 2013, according to Education Department data.

About 40 million people owe roughly $1.6 trillion in federal student debt. But because student-loan rates are generally fixed, higher rates won’t affect much of the existing debt.

And even for the students who are taking out new loans, the higher rate isn’t likely to create a huge sticker shock. But it adds to a financial burden that many families are already feeling this year amid higher costs for groceries, rent and gas. Home prices and mortgage rates have also been shooting up. Last week, the average rate on a 30-year fixed-rate mortgage hit 5.27%, the highest level since 2009.

Under the direct-loan program, students can borrow up to $27,000 from the federal government over four years. Yearly lending caps mean most students borrow in increments each year they are enrolled. There are higher caps for students who are in grad school or who aren’t dependents of their parents.

A student who borrows the full $27,000 could finish school owing about $29,500 under the current interest rate, Brad Baldridge, a Wisconsin-based college-funding consultant, estimated. If the rate jumps to about 5% this summer, the same student could end up owing about $30,400 at graduation, he said.

(For simplicity, these calculations assume that the rate stays at the same level for each of the four years. Some direct loans for students with financial need are subsidized, meaning they don’t accrue interest while the student is in school.)

For most families, college is such a firm goal that bigger costs aren’t a strong deterrent, Mr. Baldridge said.

Students don’t have to start repaying federal student loans until after they leave school.

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A moratorium put in place at the start of the pandemic paused monthly payments and interest accrual for borrowers who have left school, and broadly paused interest accrual for students who are still in school. The Biden administration recently extended the moratorium through August.

Lucas Ruszkowski, a 20-year-old finishing his junior year at the College of Charleston in Charleston, S.C., has been funding some of his degree with federal loans and plans to borrow an additional $7,500 from the government for his senior year this fall.

Mr. Ruszkowski, an aspiring investment banker, said he is aware that interest rates will likely rise. But he isn’t concerned.

“The way that I primarily have thought about my student debt is that I could justify taking it out if my degree would help me be something that will make me more money in the long run,” Mr. Ruszkowski said. Even with rising rates, the math still makes sense, he said.

The federal government’s role in student lending has been the subject of recent political wrangling.

President Biden is considering some student-loan forgiveness for people who make less than $125,000 a year, the White House said last week. Republicans and some moderate Democrats are expected to oppose forgiveness of any kind, while progressive groups and some left-leaning Democrats have argued that such a plan doesn’t go far enough.

Whether the president can legally cancel a broad swath of student debt by executive order is up for debate, and the issue could end up in court.

During the 2020 presidential primaries, progressive candidates such as Elizabeth Warren and Bernie Sanders outlined plans to cancel much or all federal student debt, arguing that big loan burdens have weighed down some graduates. Critics say that across-the-board loan forgiveness could add to already rampant inflation and would mainly benefit higher- and middle-income income graduates.

Write to Matt Grossman at [email protected]

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Rachel Meadows

Rachel Meadows

Trending topics news writer who enjoys cooking, walking her dog and travel.

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