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

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

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

Federal student loan rates are expected to rise significantly due to the notable increase in bond yields this year. 10-year Treasury bill auctions usually take place in February, May, August and November.

The Ministry of Education suspended loan repayments and set the interest rate at 0% until August 31.

Outside of the forbearance plans, subsidized direct loans and unsubsidized direct 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 at 6.28%.

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

INFLATION DROPS FOR FIRST TIME IN MONTHS, BUT STILL AT 40-YEAR HIGH

Fed rate hikes to drive up interest rates

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

“Although overall economic activity declined slightly in the first quarter, household spending and business fixed investment remained strong,” the Fed said in its post-meeting statement. “Jobs gains have been robust in recent months and the unemployment rate has fallen significantly. Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising oil prices energy and broader price pressures.”

The rate hike came as inflation rose 8.3% a year in April, remaining close to a 40 years tall, according to the Bureau of Labor Statistics (BLS). As a result, the Fed should continue to raise rates to bring down inflation.

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

FEDERAL RESERVE RAISES INTEREST RATES AT MAY MEETING – WHAT YOU NEED TO KNOW

Interest rates will continue to rise

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

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

Although private student loans are not affected by the Treasury auction, they could increase due to Fed rate hikes. If you want to take advantage of today’s interest rates, you can consider refinancing your private student loans. To see if this is the right option for you, contact Credible to speak with a student loan expert and get all your questions answered.

You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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