IInterest rates on new federal student loans are expected to rise by more than a full percentage point this year, which means borrowing money to pay for college is about to get a whole lot more expensive.
Undergraduate loans will now have a rate of 4.99%, up from the relatively low rate of 3.73% last year. Direct graduate student loans will bear interest at 6.54%, down from 5.28% previously. PLUS loans (for both parents borrowing for their children and graduate students) will have an interest rate of 7.54%, down from 6.28%.
The new rates will come into effect on July 1 and will apply to loans issued for the 2022-2023 academic year. They are linked to the interest rate on the 10-year Treasury note, which was determined by a Treasury auction on Wednesday. They do not apply to private student loans.
Interest rates on federal student loans reset each year and are fixed for the life of the loan. Many student borrowers take out new loans each year they are in school, so it is possible for students to take out multiple loans with several different interest rates – some more forgiving than others. Next year’s hike will mean students taking out new loans will end up paying hundreds of dollars more in interest than they will on older loans at lower rates.
The new higher rates are not entirely out of step with recent history, however. In 2018, fixed rates on undergraduate student loans reached 5.05%.
Why Are Student Loan Interest Rates Rising So Fast?
The big jump in rates on 10-year Treasury bills is due to recent actions by the Federal Reserve, which raised its benchmark interest rate by half a percentage point last week to combat the surge in inflation. The hike was the second so far this year.
The rate hike also comes amid a heated national debate over student loan forgiveness. Some 40 million Americans cumulatively owe $1.59 trillion in student loans, according to data released this week by the Federal Reserve Bank of New York.
Payments on federal student loans have been suspended and interest rates set at 0% since the start of the pandemic (they are expected to resume in September), but many Americans and progressive lawmakers are pushing for President Biden to cancel a portion of student debt via executive order. It’s unclear what Biden plans to do yet, but here’s everything we know so far.
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