Looking a little closer at the student loan repayment interest rates

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I find that learning about interest rates is probably one of the most boring of topics. However, to fully understand your student loans and other loans and how lenders decide what interest rates to charge, you need to understand the basis of where these numbers come from. I will explain:

Stafford Loans = End of May 91 day T bill + 1.7% rounded to nearest 8th percentage point: When the federal government decides how much interest to charge for student loans…there are a few things that goes into the actual interest rate number. The treasury bill auction at the end of May sets the new repayment rate on student loans for the new year. This date is July 1st. That is why July first is the day when you need to have consolidated your loans. The repayment rate is the T bill rate + 1.7 percentage points rounded up to the next eighth of a percent. The repayment rate after 6 months becomes the T bill rate + 2.3 percent points.

When you consolidate your loans, you lock in this repayment rate. The reason why 2007-2008 will have an unchanged 6.8 percent interest rate on the stafford loan is because at May 29 of this year was 4.92 percent which if you add 1.7 points will be rounded to 6.8 percent. This is how the interest rate for stafford loan is created.

Say that you graduated, you get 6 months grace right? after that grace, you start to pay your loans off. You can consolidate and you should consolidate before the 6 months because of the added 0.6 point increase in the rate. The reason why people consolidate before july 1st sometimes is because of the change in the T bill rate. Remember though that for 2006-2007 and all loans up to 6/2012 the in-school rate and the repayment rate is fixed at the same percentage rate level.

also remember that there is a cap of 8.25% on these loans so they will never be any higher than that regardless of consolidation.

federal PLUS loans = The PLUS loan was changed from 7.9% to 8.5% by the Higher Education Reconciliation Act of 2005 passed on Feb 8th 2006. It is a fixed rate but before this fix, it was also based on a 3 percent premium on the 91 day T bill.

PERKINS loans = these are set at 5% and I don’t think these loan interest rates are based on any kind of Tbill or bond.

Private loans = private loans have some basis with what is called LIBOR (London Interbank Offered Rate) which is a daily reference rate based on interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market. Basically its a short term interest rate that changes. The best private student loans have interest rates of LIBOR + 1.8% or PRIME - 0.5% and charges no fees. These should be close to and competitive with Federal PLUS loans. LIBOR currently runs around 5.3x percentage points and private loans change quarterly so they take the new LIBOR and add the basis points on top of that.

the PRIME is published by the Federal reserve bank and is the interest rate that is charged by lenders to borrowers deemed creditworthy. The prime rate runs about 300 basis points (3 percent points) above federal fund rate (interest rate which depository institutions lend balances at the federal reserve to other depository institutions). Prime rate currently runs at 8.25% and based on the lender, your rate changes quarterly. Credit cards also use the prime to calculate how much to charge the card holder!

As you can see, interest rates are pretty easy to understand and now you know why your rates are the way it is!

Other Interest Rates of Interest!

• 30 year fixed rate mortgage 6/7/2007 = 6.53%
• 91 day T bill 6/8/07 = 4.67%
• CD 6 month 6/8/07 = 5.35%
• 1 year CMT (constant maturity treasury) 6/8/07 = 4.98%
• LIBOR 1 month 6/8/07 = 5.32%
• LIBOR 3 month 6/8/07 = 5.35%
• Prime lending rate 6/6/07 = 8.25%

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