Fed to raise interest rates on student loans

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Students entering college this fall may have to pay a higher interest rate on their federal students loans.

The change comes as the Treasury wrapped up their annual spring auction of 10-year Treasury notes on Wednesday.

Starting July 1, the rate on the highly popular Stafford undergraduate loans is expected to rise from 3.76% to 4.45% while the rate on Stafford graduate loans will rise from 5.31% to 6%.

The rate on the PLUS loans for graduates and parents is expected to rise from 6.31% to 7%.

Interest rates on federal student loans are fixed, i.e. they do not change over the life of the loan, but the rates on new loans change year-to-year.

The amount a student can borrow each year is capped, meaning students cannot borrow in bulk, anticipating changing interest.

The annual change in interest on a new student loan is calculated by adding the yield of the loan to the yield of a 10-year Treasury note after the May auction, which this year increased from 1.71% to 2.40%.

Loans purchased before July 1 will not be affected by the increases; however, freshmen entering college in the fall semester cannot purchase loans before that date.