The 2015-2016 federal student loan interest rates don't apply retroactively to debt borrowed in previous years.
Here's the good news: New federal student loans are cheaper this year. The 2015-2016 federal student loan interest rates take effect July 1 and are more than one-third of a percentage point cheaper than last year's rates.
"This is something that's going to continue to happen and it's going to fluctuate with the market," says Jan Miller, president of Miller Student Loan Consulting, about the change in federal interest rates.
[Take these steps to understand student loan interest rates.]
Interest rates are currently pegged to the yield on the 10-year Treasury note, with a set percentage added on. That "add-on" is smaller for undergraduate debt than for graduate and parent loans, meaning that college students typically get the cheapest deal on federal loans.
Here's what to know about the effect the new rates will have on borrowers' bank accounts.
1. They will save borrowers money in the long run. How much a borrower saves with this year's lower rates depends on the type of federal loan they borrow, the amount of debt and length of repayment.
A first-year student taking on $5,500 in unsubsidized Stafford loans, which don't have interest covered in school, will pay about $117 less in interest over the standard 10-year repayment plan than they would have under the previous rates, according to a student loan repayment calculator.
A graduate student taking on $20,500 in unsubsidized debt will save about $457 over the same plan. A parent borrowing $30,000 in PLUS debt can expect to pay about $687 less over a 10-year repayment plan than if they had borrowed those loans the past year.
2. They don't apply to old loans. Borrowers who took on loans in previous years won't see these rates apply to their old debt.
Borrowers with older federal loans who want to tweak their rates can consider consolidating, which combines multiple loans into a single payment and averages their interest rates. They can also look into refinancing through a private lender, which typically recalculate a new rate based on the borrowers'financial health, among other factors.
[Know the risks and rewards of private student loan refinancing.]
3. They don't apply to private loans. While private loan rates may also fluctuate with the market, those lenders typically determine their rates differently. They may factor a borrower's credit history, ability to repay and other information into the rate calculation.
[Ask these 10 questions before borrowing a private student loan.]
Private loan borrowers may have a chance to choose a fixed-rate private loan, which keeps interest consistent during repayment, or opt for a variable rate, which moves with the market.
The takeaway: While the change in federal rates are worth noting, its effect is limited. "For your average borrower, with around $33,000 in debt, it's fairly insignificant," says Miller.
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