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.
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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