Students borrowing in the academic year 2023-24 will pay more as interest rates on federal student loans rise to levels not seen for a decade.
Beginning July 1, the Federal Student Aid office of the Education Department announced that interest rates on new federal direct student loans would rise from the current 4.99% to 5.50 percent. This is up from the previous rate of 4.99% for the academic year 2022-23 and the prior rate (3.73%) in 2021-22.
The interest rates for graduate direct loans will increase to 7.05%, up from 6.54% in the previous year. PLUS loans that parents or grad students use to cover education funding gaps will increase to 8.05%, up from 7.54%. The following are the new rates that will be charged for federal student loans in 2023-24 compared to the academic year 2022-23:
Direct loans to undergraduates: 5.5%, up from 4.99%.
Direct Graduate Loans: 7.5% up from 6.54 %.
Plus loans now 8.05% instead of 7.54%.
Since 2013, the interest rate on direct undergraduate student loans has not been as high. The interest rates for direct graduate and PLUS loans introduced in 2006 with fixed rates have never been higher.
College costs are rising
Paying off your loans becomes more expensive with higher interest rates. The government fixes the federal student loan rates each year in late-May, by combining the U.S. Treasury 10-year note yield and an “add-on percentage” that varies based on the loan type. Final rates are applicable to all new loans starting on July 1.
In the end, increasing interest rates will increase college costs for millions of students who borrow money and their families. According to NerdWallet, today, 44 million Americans collectively owe $1.6 trillion worth of federal student loan debt. Federal loans make up 93% of total student debt, according to Department of Education data and Federal Reserve statistics.
If you begin college in the fall of this year and take out a $31,000 federal loan (which is the maximum amount available for undergraduates with dependents), you will end up repaying almost $50,000 using a 10-year standard repayment schedule. In 2020-21, if you had started college and borrowed the same amount of $31,000 in federal loans with an interest rate that was a record low 2.75%, you’d have to pay back around $39500, including interest, over 10 years.
All students taking out federal student loans in 2023-24 will be charged higher interest rates. All federal student loan interest rates are fixed, and will not change over the course of repayment.
Federal vs. private student loan interest rates
Federal student loans used to offer lower rates and fees than the private options, but this may not be the case anymore for certain borrowers. According to an analysis by NerdWallet in January 2023, the average fixed-rate private undergrad loan has interest rates ranging from 5.99% to 13.78%. Private loans could become more appealing.
Private student loans do have some drawbacks. To qualify for lower rates, they usually require that the student has a good credit rating or that a cosigner also has a good credit rating. Co-signers, usually parents, are equally responsible for the loans. Co-signers are not allowed for federal student loans, and only federal PLUS loan require credit checks.
Federal loans offer other benefits, such as payment plans which cap your monthly bill at a percentage of your earnings, payment suspensions in the event you are laid off or have financial difficulties, and forgiveness programs. These protections are not usually offered by private loans.
Although federal interest rates have some room for growth, they may soon reach a limit. According to the Higher Education Act (HEA), rates cannot exceed 8.25% on undergraduate loans, and 9.5% on graduate loans. PLUS loans are also limited to 10.5%. The maximum rates of private student loan lenders are much higher.
Reduce borrowing by submitting the FAFSA
You can reduce your college debt and interest over time by taking advantage of funding options that you don’t need to pay back, such as scholarships, grants and work-study.
FAFSA is the free application for federal student aid that you’ll have to fill out to be eligible for many grants, both state and federal. This includes the need-based federal Pell Grant which can provide students with up to $73,95 in college funding per year starting in 2023-24. Many scholarships require that applicants submit their FAFSA. This includes some scholarship offered by private groups.
Don’t wait to fill out the FAFSA. It will be open for 2023-24 until June 30th, 2024. You can increase your chance of receiving more funding by completing the FAFSA as quickly as you can. Certain types of assistance draw money from limited funds and may run out.