Who sets US student loan interest rates and how?

[SFO-IST]

Hey everyone,

I've spotted some threads on SDN where people talk about their 2.8% student loans and 4.5% student loans from several years ago. Looking at interest rates here:

http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=USD

I am seeing that the US interest rates are down to almost nothing. Why are student interest rates still sky high at 6.8%? Who sets them and how are they set? It seems bizarre that the entire country enjoys low rates while we are stuck with high rates.

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[TMP-SMX]

They have been set at a fixed rate of 6.8% for a while now. For undergrads they are a bit lower now but these rates were set at a time with a better economy. 6.8 isn't great but it could be worse. At least it is fixed.

 

[boggvir]

Government sets them for stafford, grad plus, etc.

 

[southerndoc]

Previously they were tied to the last auction of the 91-day Treasury bill for May (as student loan interest rates were reset every July 1). I think it was 91-day T-bill's interest rate plus 50 basis points when I was in school.

Now because of revised legislation, it's no longer tied to the T-bill (as far as I know, correct me if I'm wrong). This went into effect July 1, 2006. As I graduated in 2004, I've no longer kept up with it very closely.

 

[freaker]

Actually, the federal government attempted to grab control over the distribution of all college loans and shove private lenders out of the mix, raising interest rates to 6.8% as they've done with medical school loans. (Thus borrowing money at 2.8% and lending it to students at 6.8%).

However, this was done in the Obamacare healthcare law, which has now been declared null and void in its entirity by a federal district court judge in Florida. That would seem to throw a monkey wrench in the student loan business. Thus, I have no idea if private lenders are anymore allowed into the mix.

I do know that private lenders were certainly offering loans less expensively than 6.8%. I don't know if that is the case currently or not.

 

[dpmd]

They are set by the government and like southerndoc said had a variable interest rate that was tied to T bills. Those of us with low rate loans were fortunate enough to consolidate them at a fixed rate that was the weighted average of the current rates on all our loans. Since variable rates can cause problems for people with fixed incomes who are trying to pay them off (I'm sure there are some folks out there who experienced the max rate) because then the payment can change significantly, they decided to go for a fixed rate.

Why they picked what they did probably has to do with the rates at the time they were thinking about it and also their prediction of what to charge to ensure they can keep the program running (since we are talking about non-creditworthiness based unsecured loans that people can take a very long time to begin paying, and can take a very long time to complete paying)

Considering that rates for unsecured loans can range anywhere from Prime (which at present is 3.25%) plus 1 to over 100% (places like cash call), 6.8% isn't a bad rate

Don't confuse the interest rate you see on that page with the rate that people pay on any kind of loans they obtain. That interest rate is what banks charge other banks for short term loans (like overnight). Consumer interest rates are different.