Federal interest rate student loans are expected to rise nearly a full percentage point later this year, raising the price of borrowing to pay for college education for current and incoming students.
The new rates, which are based on the results of a Treasury survey auction Wednesday, apply only to loans issued for the next academic year 2021-2022. Undergraduate student loans will carry a rate of 3.73%, up from 2.75% this year. Graduate students have two types of loans: Direct Unsubsidized Loans, which will carry an interest rate of 5.28%, up from 4.30% this year, and PLUS Loans, which will drop from 5.30% to 6.28%. Parents who borrow for their children’s school fees will also pay 6.28%. The new interest rates take effect July 1.
The increase is not necessarily a surprise, given that rates for the current academic year marked a historic low and that borrowing costs are rising across the board in the face of inflation fears. Still, higher rates on federal loans mean borrowers next year will likely pay hundreds of dollars more in interest over the life of their loan.
Federal student loan interest rates have been tied to the 10-year Treasury bill rate since 2013, when Congress decided to reset interest rates each year based on market conditions.
Federal student loan interest rates are fixed for the term of the loan, which means borrowers who take out loans next year will continue to pay the new, higher rates for years to come. Students typically take out new loans each year they’re in school, so it’s not uncommon for a bachelor’s graduate to have four (or more) different loans with different interest rates at the end. of his studies. For an upper-class student who borrows the annual maximum of $7,500 next year and pays off the debt 10 years after leaving school, the higher rates will increase the total amount paid over the life of the loan by $7,500. $ over $400, compared to this year’s rates. .
Despite the rate hike this year, it is important to note that interest rates on federal loans, especially undergraduate loans, are still relatively low, both compared to previous federal rates and available rates. in the private market.
Fixed interest rates on federal student loans, for example, soared to 6.80% for undergraduates in 2007, and were at 5.05% in 2018. In fact, over the In the past 15 years, they have only fallen below 4% four times. , including the current year. While the current is fixed private student loan rates also start around 4%, only the most desirable applicants – those with co-signers with comfortable incomes, stable borrowing histories and high credit ratings – get these rates. Others may pay more than 10% for private loans.