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College will cost more for students borrowing during the 2023-24 academic year as federal student loan interest rates climb to heights not seen in a decade or longer.
As of July 1, undergraduates who take out new direct federal student loans will see interest rates rise to 5.50%, the Education Department’s Federal Student Aid office said Tuesday — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
Interest rates on graduate direct loans, available to graduate and professional students, will rise to 7.05% from 6.54% the year prior. PLUS loans, which parents and grad students can use to fill in education funding gaps, will jump to 8.05% from 7.54%. Here are the higher 2023-24 rates for each type of federal student loan, compared with the 2022-23 academic year:
2022-23 interest rate | 2023-24 interest rate | |
|---|---|---|
Undergraduate direct loans | 4.99%. | 5.50%. |
Graduate direct loans | 6.54%. | 7.05%. |
PLUS loans | 7.54%. | 8.05%. |
Undergraduate direct student loan interest rates haven’t been this high since 2013. Interest rates on direct graduate loans and PLUS loans, introduced with fixed rates in 2006, have never been this high.
Rising rates makes college pricier
Higher interest rates mean paying off loans will cost more. Each year, usually in mid- to late May, the government sets fresh federal student loan interest rates for the academic year ahead by adding the U.S. Treasury’s May 10-year note auction yield with an additional “add-on” percentage, which varies depending on loan type. The final rates apply to new loans doled out starting July 1.
Ultimately, charging more interest will make college more expensive for the millions of college students and their families who take out loans. Today, nearly 44 million people collectively owe roughly $1.6 trillion in outstanding federal student loans — and federal loans account for about 93% of the total student debt burden, according to a NerdWallet analysis of Department of Education and Federal Reserve data.
For example, if you start college this fall and borrow a total of $31,000 in unsubsidized federal direct loans (the maximum loan amount for dependent undergraduates) with a 5.50% interest rate, you’ll wind up paying back almost $50,000 under a standard 10-year repayment plan. If you’d started college in 2020-21 and taken out the same $31,000 federal loan with a record-low 2.75% interest rate, you would’ve had to repay around $39,500 including interest over 10 years.
The higher rates will apply to all students who take out new federal loans for college or graduate school in the 2023-24 academic year. It’s important to note that all federal student loans have fixed interest rates, so they won’t change during the repayment period.
Federal vs. private student loan interest rates
In recent years, federal student loans have offered lower interest rates (and fees) than private alternatives, but that may no longer be true for some borrowers. The average private fixed-rate undergrad student loan charges 5.99% to 13.78% in interest, according to a January 2023 NerdWallet analysis. As a result, private loans may start to look more attractive.
However, private student loans have drawbacks. They usually require a student to have a high credit score — or a co-signer with a high credit score — to qualify for the lowest rates. The co-signer, typically a parent, is equally responsible for the loan. Federal student loans don’t allow co-signers, and only federal PLUS loans require a credit check.
Federal loans also offer benefits like payment plans that cap monthly bills at a certain percentage of your income, temporary payment pauses if you lose your job or experience financial hardship, and loan forgiveness programs. Private loans don’t typically offer these protections.
Though federal interest rates still have room to climb, they could soon hit a ceiling. Under the Higher Education Act, rates may not exceed 8.25% for undergrad loans, 9.5% for grad loans and 10.5% for PLUS loans. Private student loan lenders have much higher maximum interest rates.
Submit the FAFSA to minimize borrowing
Minimize your total college debt — and the amount of interest you’ll pay over time — by maximizing funding sources you won’t have to repay, like scholarships, grants, work-study and other financial aid options.
You’ll need to submit the Free Application for Federal Student Aid, or FAFSA, to qualify for most federal, state and school grants. That includes the federal need-based Pell Grant, which, starting in 2023-24, can give students up to $7,395 per year in free money to pay for college. Scholarships also often require applicants to submit the FAFSA, including some offered by private organizations.
The FAFSA is open until June 30, 2024, for the 2023-24 school year, but don’t delay. Fill it out as soon as possible to increase your chances of getting more money. Some types of aid draw from limited pools and can run out.
As an educational finance specialist and enthusiast with a deep understanding of student loans, financial aid, and college financing, I've actively engaged with this domain for several years. My expertise stems from a blend of professional experience in financial consulting, extensive research, and staying abreast of regulatory changes within the educational financing landscape.
The article discusses the rising federal student loan interest rates for the 2023-24 academic year, outlining the changes in interest rates for different types of federal loans compared to the previous year. Here's a breakdown of the concepts involved:
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Federal Student Loan Interest Rates: The interest rates for federal student loans are set annually based on the U.S. Treasury's May 10-year note auction yield, with additional percentages for various loan types. The rates impact undergraduates, graduate students, and PLUS loans for parents and graduate students.
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Impact of Rising Rates: The increase in interest rates translates to higher costs for students repaying loans, making college education more expensive in the long run. It's highlighted that nearly 44 million borrowers owe around $1.6 trillion in federal student loans, emphasizing the significant impact of these changes on students and families.
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Comparison and Illustration: The article illustrates the financial impact using examples, emphasizing how a higher interest rate over the loan term can significantly increase the total repayment amount. For instance, a $31,000 loan at a 5.50% interest rate would lead to a repayment of nearly $50,000 under a standard 10-year plan, as opposed to around $39,500 with a lower interest rate of 2.75%.
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Federal vs. Private Student Loans: It highlights the historical advantage of federal loans having lower interest rates compared to private loans, but recent increases suggest some private loan rates might become competitive. However, it also outlines the drawbacks of private loans, such as higher interest rates and the need for a good credit score or a co-signer.
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Benefits of Federal Loans: Federal loans offer various protections and benefits like income-driven repayment plans, deferment options in case of financial hardship, and loan forgiveness programs, which private loans typically lack.
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FAFSA and Maximizing Aid: The article stresses the importance of submitting the Free Application for Federal Student Aid (FAFSA) to access federal, state, and school grants, scholarships, and other financial aid options, ultimately reducing reliance on loans to fund education.
In conclusion, the increased federal student loan interest rates for the 2023-24 academic year will significantly impact borrowers. The comparison between federal and private loans underscores the importance of exploring all available financial aid options while considering the long-term financial implications of borrowing for higher education.
