Every month, the US Treasury Department auctions off bonds to fund government debt. He held one such auction on Wednesday, selling 10-year Treasury bills at an interest rate of 2.94%.
It’s the highest rate at auction in quite some time, and it affects not only the bond market, but many things, including how much it costs to borrow money for college. The federal government issues about $90 billion in student loans each year, and the interest it will charge in the near future is a direct result of Wednesday’s auction performance.
Congress established a formula to tie student loan interest rates directly to the yield of the 10-year Treasury bill in 2013.
“Before that, Congress kind of invented an interest rate, believe it or not,” said Jason Delisle, senior policy fellow at the Urban Institute.
According to Delisle, after the housing crisis and the recession of 2008, an interest rate that did not change seemed out of sync with the markets.
“People said back then, ‘Why can’t this work like mortgages?’ So that was the idea,” he said. “A 10-year Treasury plus about 2 percentage points, at least for undergraduates, is the system that gets you pretty close to what a mortgage rate is.”
Under the current system, the interest rate for new federal student loans changes every July. For undergraduate loans, the government takes the May auction yield and adds about 2 percentage points.
Graduate students and parents have a higher mark-up, and when the 10-year yield increases, as it did on Wednesday, it will cost new borrowers more.
Mark Huelsman is the director of policy and advocacy at the Hope Center for College, Community, and Justice at Temple University.
“They’re going to pay, you know, in some cases, thousands of dollars more on their debt than students who went to school maybe last year or a few years ago,” Huelsman said.
Currently, there is a federal pause in student loan repayments, and no interest accrues during this time. But that pause is set to end on August 31, which means students will have to think about how they will pay off their debt and perhaps how much they will take on in the first place.
“There are certain occupations where the job market doesn’t pay you very well for those jobs,” said Catharine Hill, executive director of education at nonprofit Ithaka S+R.
Hill said if students want to do these jobs or don’t know what they’re going to do, they shouldn’t borrow huge amounts of money. It might be difficult for them to repay it.
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