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How Treasury Yields Affect Student Loan Rates Under New Bill

08/16/2013 08:21 am ET | Updated Oct 15, 2013

Following a lengthy battle between lawmakers, President Barack Obama finally signed the bill on Friday that reduced the federal student loan interest rates for millions of students. Federal loans will now be pegged to the yields of a 10-year Treasury note, a low-risk government security sold by the Treasury, a bank or broker.

Instead of the 6.8 percent interest rate that automatically kicked in on July 1, students who receive Stafford loans will face a 3.86 percent interest rate. Unsubsidized loans for graduate students will have a 5.41 percent interest rate while PLUS loans have a 6.41 percent interest rate (originally, 7.9 percent for PLUS loans). There are rate caps for each type of loan.

Although the bill was passed just recently, these rates will be applied retroactively to loans issued since July 1.

Here's a table showing how federal student loan interest rates will be determined in the future.

All rates apply for the entire life of the loan.

Track the 10-year Treasury note

The 10-year Treasury note is one of the many government securities that are available to investors. The yield on the 10-year Treasury note, which fluctuates based on supply and demand, is often used as an economic indicator -- an increasing yield typically signals a brighter economic outlook by the market.

According to the newly-passed bill, federal student loan rates are tied to the 10-year Treasury note auctioned at the final auction held prior to June 1 of each year.

In 2013, the last auction for the 10-year Treasury note was held on May 8. The yield was 1.81 percent. In 2007, when the U.S. economy was booming, the 10-year Treasury note had a yield of 4.612 percent.

Borrowers can look up the yields for 10-year Treasury notes at TreasuryDirect.gov.

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Simon Zhen is an analyst, staff writer and columnist for MyBankTracker.com. His columns draw focus to all aspects of personal finance and to bank rates, products, and services.