US: Federal Student Loan Interest Rates Will Reach Their Highest Level In A Decade


Because federal student loan interest rates are rising to levels not seen in a decade or more, college will cost more for students who borrow during the 2023–24 school year.

According to the Education Department’s Federal Student Aid division, interest rates on new direct federal student loans for students will increase to 5.50% on July 1 from 4.99% in the 2022–23 school year and 3.73% in the previous year.

Graduate and professional students may borrow graduate direct loans, with interest rates increasing from 6.54% to 7.05%. The rate on PLUS loans, which graduate students and parents can use to close financial gaps in college, will increase to 8.05% from 7.54%. In comparison to the 2022–2023 academic year, the higher rates for each category of federal student loans are as follows:

2022-23 interest rate2023-24 interest rate
Undergraduate direct loans4.99%.5.50%.
Graduate direct loans6.54%.7.05%.
PLUS loans7.54%.8.05%.

Interest rates on undergraduate direct student loans haven’t been this high since 2013. Direct Graduate Loan and PLUS Loan interest rates have never been higher since they were established in 2006 with fixed rates.

Rising rates makes college pricier

Higher interest rates result in more money being spent on loan repayment. The government sets new federal student loan interest rates every year, often in mid- to late May, by adding the yield from the May 10-year note auction by the U.S. Treasury with an additional “add-on” percentage that varies based on the kind of loan. The final interest rates are valid for new loans issued as of July 1.

The millions of students and families who borrow money will ultimately pay more for education as a result of higher interest rates. According to a NerdWallet study of Department of Education and Federal Reserve data, about 44 million Americans together owe about $1.6 trillion in outstanding federal student loans, which make up about 93% of the entire student debt burden.

For instance, if you enroll in college this fall and take out a total of $31,000 in unsubsidized federal direct loans (the maximum loan amount for dependent undergraduates), you’ll pay back approximately $50,000 over the course of a typical 10-year repayment plan. If you had begun college in 2020–2021 and borrowed the same $31,000 in federal loans at a historically low 2.75% interest rate, you would have had to pay back roughly $39,500 in total over ten years.

All students who get new federal loans for undergraduate or graduate study for the academic year 2023–24 will be subject to the higher rates. All federal student loans have set interest rates, so they won’t vary over the payback period, which is crucial to understand.

Federal vs. private student loan interest rates

Federal student loans have historically had cheaper interest rates (and costs) than private options, but for some borrowers that may no longer be the case. According to a January 2023 NerdWallet analysis, the typical private fixed-rate undergrad student loan carries an interest rate between 5.99% and 13.78%. Private loans can appear more appealing as a result.

Private student loans do have disadvantages, though. To be eligible for the lowest rates, they typically require a student to have a high credit score or a co-signer with a high credit score. The co-signer, who is usually a parent, bears equal liability for the debt. Co-signers are not permitted for federal student loans, and only federal PLUS loans are subject to a credit check.

Federal loans also come with perks like debt forgiveness programs, interim payment pauses in the event of job loss, and payment plans that cap monthly obligations at a specific proportion of your income. These safeguards are frequently absent from private loans.

Although there is still opportunity for growth in federal interest rates, a cap may soon be reached. Rates for undergraduate loans, graduate loans, and PLUS loans cannot be higher than 8.25%, 9.5%, and 10.5%, respectively, under the Higher Education Act. Maximum interest rates for private student loan lenders are significantly higher.

Submit the FAFSA to minimize borrowing

By leveraging funding sources that you won’t have to return, such scholarships, grants, work-study opportunities, and other financial aid alternatives, you can reduce your overall college debt—and the amount of interest you’ll pay over time.

To be eligible for the majority of federal, state, and school grants, you must complete the Free Application for Federal Student Aid, or FAFSA. Included in this is the federal Pell Grant, which, beginning in 2023–2024, can provide students with up to $7,395 in free money per year to help pay for college. The FAFSA is frequently required for scholarship applications as well, including those from private organizations.

Don’t wait to submit your FAFSA; it will be open until June 30, 2024, for the 2023–24 academic year. As soon as you can, fill it out to improve your chances of receiving extra funding. Some forms of assistance draw on finite resources and may run out.

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