Two years ago, federal student borrowers enjoyed the lowest interest rates ever on their loans. This fall, rates for undergraduate borrowers will be nearly double what they were in 2020-21.
Interest rates on new federal direct undergraduate student loans are expected to drop to 4.99% for the 2022-23 academic year, from 3.73% last year and 2.75% in 2020-21. Interest rates on direct graduate loans are also expected to increase to 6.54%; parent and graduate PLUS loans will increase to 7.54%.
Since the new interest rates come into effect from July 1, any new loans taken out before this date will bear the interest rates for the 2021-22 academic year.
Direct Undergraduate Loan
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Rising rates make college more expensive
Higher interest rates mean that loan repayments will be more expensive. For a dependent undergraduate student, a $5,500 loan — the maximum that student could borrow — will cost $6,997 over the standard 10-year repayment term with an interest rate of 4.99%. At the 2020-21 rate of 2.75%, this loan would cost $6,297.
Those who take direct and PLUS loans for graduates will see the cost of borrowing increase even more. In addition to higher interest rates, PLUS loans carry an origination fee of 4.23% and have no borrowing limit.
According to the Hechinger Report, a nonprofit focused on education issues, the average PLUS loan in 2019 was around $14,000. This loan amount, taken out with a standard term of 10 years and an interest rate of 7.54% next year, will cost $19,977 over the life of the loan, including $5,977 in interest.
Interest rates for federal student loans are set by the Treasury Department’s 10-year note auction in May. The interest rate on the May 10 Notes, 2.94%, is added to the margins set by Congress, and these margins differ for different types of federal student loans.
For undergraduate direct loans, 2.05 percentage points are added to the interest rate; graduate student loans have 3.6 points added and 4.6 points for PLUS loans.
Submit the FAFSA and consider the gain
Increases in federal student loan interest rates make it even more important to consider college payoff and whether any debt you are incurring is worth it.
Nevertheless, even with higher interest rates, federal student loans are the best option for financing your education if you need loans. Submit the Free Application for Federal Student Aid, or FAFSA, to be eligible for federal, state, and school aid.
Submitting the FAFSA also allows you to be considered for grants and other aid that you don’t have to repay, such as the Pell Grant. Once you’ve taken advantage of aid that you don’t have to repay, exhaust all federal student loans available to you before opting for private student loans. Federal student loans offer more protections to borrowers.
The benefit of attending college will vary depending on your major, the cost of attendance, and the amount of debt you must incur to fund your education. If the gain is unclear to you, consider college alternatives or start at a community college before moving on to a four-year school to get your bachelor’s degree.