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Decade-high rates

Federal student loan rates get recalculated every year, based on the 10-year Treasury bond auction in May, and remain fixed for loans taken out during the 12-month period.

So, if you took out a loan last year, it won’t be affected by the new rate since it’s locked in to an older rate — but if you’re taking out a new loan between July 1 of this year and June 30 of next year, be prepared for the higher cost of borrowing.

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For undergraduate student loans this coming academic year, the interest rate will jump from 4.99% to 5.5% — the highest it has been since 2013, when the rate spiked to 6.8% before Congress passed a bipartisan bill to cut it in half.

Graduate students will contend with a hefty rate of 7.05%, up from the current 6.54%, and the federal PLUS loan rate for graduate students or parents paying for their children’s education will climb from 7.54% to 8.05%.

These rates are the highest they’ve been since 2006, when Congress began requiring direct federal student loans to have fixed rates.

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Comparison before the freeze

The high amounts borrowers will be paying on new loans seems more drastic when comparing these rates to what they were in the 2020-2021 academic year.

For example, say you’re taking out a $5,500 loan, assuming a 10-year term, you could be paying almost $60 a month on that debt with a 5.5% interest rate.

In 2020-2021, when the interest rate dropped to a record low of 2.75%, you’d pay just $52 a month — and save about $865 in interest over the lifetime of the loan.

If you’re the parent of a student, you could take out a PLUS loan with a 8.05% interest rate. Parents can basically borrow for the child's cost of attendance minus any other financial aid, so if your child's cost of attendance for the year is $6,000, and they receive $4,000 in other financial aid, you can borrow up to $2,000 with a PLUS loan.

Assuming a 10-year term, a parent could pay about $24 a month on that debt with the new interest rate, compared to the $22 with a 5.30% interest rate back in 2020-2021. This would also mean paying about $337 more in interest over the course of the loan.

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About the Author

Serah Louis

Serah Louis


Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.

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