College students borrowing money from the federal government for the 2018-2019 school year should expect to pay the highest interest rates in nearly a decade.
As of July 1, the interest rates for undergraduates is 5.05 percent, up from 4.45 percent the previous year, according to the U.S. Department of Education. For graduates, the interest rate is 6.6 percent, up from 6 percent the previous year.
The last time the undergraduate interest rate was this high was in the 2009-2010 school year, when it was 5.6 percent, according to federal data.
The interest rate hike could effectively raise the cost of attending college by hundreds or even thousands of dollars, said Cody Hounanian, a program director at StudentDebtCrisis, a nonprofit organization that advocates for reforming higher education funding.
“That extra cost is really a huge burden on borrowers,” Hounanian said. “The general message to current borrowers is the federal government has no problem making a profit on your student debt,”
While tuition is set by a university’s board of trustees, federal interest rates are decided by a formula specified in a 2013 federal law. That formula sets rates based on the price of treasury notes in the last auction before June 1.
Student loan debt — a total of $1.5 trillion nationwide — has reached fever pitch as recent graduates struggle to afford homes or find jobs that pay enough to afford student loan payments. The student loan crisis is particularly pertinent in South Carolina, which has the highest rates of student loan debt in the country.
The increased interest rate won’t affect those who have already taken out loans, Hounanian said.
A 2018 study by the Brookings Institution projects 40 percent of students will default on their loans by 2023. The Brookings study included both students who graduated and those who didn’t. The latter, according to experts, is an increasing part of the student loan debt crisis.
“A growing problem that we are seeing is the number of students that borrow a significant amount of money to start college, but never complete their coursework and receive a degree,” said Commission on Higher Education Interim Executive Director Jeff Schilz. “Recently, we looked at a set of about 2,100 delinquent loans in one South Carolina loan program, with over $13 million due. Over half the borrowers that haven’t made payments for 180 days never received a degree and are no longer enrolled. Obviously, this will make it difficult to pay off a debt.”
While interest rates have been expected to increase, they can get only so high. Federal law prevents student loan interest rates from exceeding 8.25 percent for undergraduates and 9.5 percent for graduate students.