The federal student loan rates are now live for 2023-24. They are at their highest level in over a decade. The interest rates on undergraduate direct-subsidized loans haven’t reached this level since the school year 2009-10, when they hit 5.6%.
According to Education Department, the new rates will apply to any loans that are taken out between July 1, 2023 and June 30, 2024. A direct undergraduate loan has an interest rate of 5.5%. Direct loans for graduate students will have an interest rate of 7.05%. PLUS loans are available to graduate students, parents and their dependents at an interest rate of 8.05%. The new interest rate on student loans is compared to the academic year 2022-2023.
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Subsidized and unsubsidised loans to undergraduates : 5.5% in 2023-24; an increase from the 4.99% of the previous academic year.
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Unsubsidized direct loans to graduate students : 7.5% for 2023-24; an increase from the 6.54% offered for 2022-23.
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Plus loans for parents and graduate students: 8.5% for 2023-24; an increase from 7.5% for 2022-23.
In a recent statement, the National Foundation for Credit Counseling (a consumer advocacy agency) said that it was important for students and their families to consider the impact of the rate changes.
What the higher interest rate means for students
You will pay more interest as rates increase.
If you borrow $5,000 for the unsubsidized direct federal undergraduate loan with a 10-year standard repayment period, your total interest cost would be $1,361 at the 4.99% interest rate in 2022-23. You will pay $150 more in interest if you borrow the exact same amount at the 5.5% rate for 2023-24, and assume the same repayment period.
Remember that these new rates are only applicable to student loans for 2023-24. The new interest rates do not affect existing federal student loans.
As consumer borrowing costs increase across all sectors, including car loans, home mortgages, and private student loans, the federal interest rates on student loans are also increasing.
According to a NerdWallet April 2023 analysis, fixed rates for private student loans generally increased over the last year. You’ll feel higher rates more if you supplement financial aid with student loans.
Comparison of federal and private interest rates on student loans
Federal student loans may be getting expensive but they are still a good deal compared to private options. Borrowers should consider federal loans first before considering private ones. Private lenders advertise fixed interest rates ranging from 5.99% up to 13.78% and variable rates ranging between 5.61% and 13.27%. This is based on an analysis by NerdWallet for May 2023.
Congress sets the interest rates for federal student loans every year. Private student loan interest rates can either be fixed – locked in throughout the term of the loan – or variable.
Private lenders may also vary the interest rate they offer based on factors such as income, credit scores, and other criteria used to assess a borrower’s repayment ability. The interest rate on federal student loans does not depend upon these factors. The same rate will be applied to all eligible borrowers.
There are other factors that you should consider in comparison to interest rates.
The federal government offers a variety of benefits to protect the borrower, such as repayment plans based on income or loan forgiveness. These options are not available for private loans.
Private lenders can make it harder for you to get favorable terms. To get the advertised lowest rates, you’ll need to have a score of at least 600, or co-signer who has a good credit rating. Most federal student loans don’t require a credit check or co-signer.
How can I reduce my student loan cost?
You can still minimize your borrowing even when rates of interest are high.
You can get federal student aid by submitting the FAFSA. This includes money that you do not have to repay, such as grants, scholarship and work-study.
You can also apply directly to your school for grants and scholarships. The NFCC recommends that alternative funding can help reduce the amount of debt students have to pay.
Maximize federal loans first before you borrow from private lenders. You’ll find that federal loans are the most affordable option. They also offer income-driven repayment plans and other benefits to help you pay off your student loan debt.
Consider future earnings when making a decision to invest in an education. According to the NFCC, it is important to compare costs to future potential earnings. A good rule is not to borrow more money than you expect to earn once you have graduated.
You can defer payments for federal and private loans while in school. You don’t need to pay for school but can.
Interest will accumulate on a federally unsubsidized student loan while you are in school. If you make payments during school, the interest added to your loan will be less. The principal will be credited directly to your loan if you make payments while in school. The total cost of your loan will be reduced by both strategies.
Chris Ebeling of Citizens, a financial institution, who is the head of private student loans said that making payments on time and in school can lead to a lower interest rate. You can build your credit which will be useful for the future when you want to buy or rent a house after graduation.