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Rates for undergraduate loans could top 5 percent next school year, adding pressure on families already struggling to pay for college.
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(Video) Student Loans Coming Back With High Interest Rates - Here's How You Can Prepare
By Ann Carrns
Interest rates on new federal student loans are expected to exceed 5 percent for the first time in five years, adding to the pressure on families already struggling to pay for college.
Rates for undergraduate student loans for the coming academic year are expected to rise to nearly 5.50 percent, from 4.99 percent. Just three years ago, rates were below 3 percent.
Rates on other types of federal education loans will probably rise as well. Loans for graduate students are likely to increase to about 7.05 percent, from 6.54 percent, while rates for PLUS loans, available to parents who need extra financing for their children as well as to graduate students, will probably increase to about 8.05 percent, from 7.54 percent.
The new rates will apply to loans made July 1 through June 2024. Rates stay fixed for the life of a federal student loan, but new loans are priced each July, based on the 10-year Treasury bond auction in May. (The Education Department hasn’t announced the rates, but Mark Kantrowitz, a financial-aid expert, calculated them using the government’s formula.) The rates are influenced by the Federal Reserve, which has been aggressively raising interest rates in an attempt to cool inflation.
Still, the impact on payments for undergraduates is relatively modest — an addition of about $2 a month on a $5,500 loan (the first-year maximum borrowing amount), with a standard 10-year repayment term.
But Persis Yu, deputy executive director of the Student Borrower Protection Center, said the “eye-popping” rate on PLUS loans, in particular, was worrisome because rates had already become unaffordable for many borrowers. “It raises the broader question of how much we are relying on debt to fund higher education,” she said.
PLUS loans are available to parents for up to the total cost of attending college. Credit checks for borrowers are cursory.
The average estimated cost of attending a four-year public college for an in-state student for the 2022-23 school year was $27,940, while the cost at a four-year, private nonprofit college was $57,570, according to the College Board, a nonprofit that administers the SAT and Advanced Placement courses.
Grants and scholarships can lower those totals. But for many families with limited incomes, borrowing is the only way of paying for their children to go to college. “There’s too big of a gap,” Ms. Yu said.
While it’s wise to borrow only as much as you need, it’s important to make sure you don’t leave yourself short of funds, said Abby Shafroth, senior attorney at the National Consumer Law Center.
“There are risks to under-borrowing, too,” she said. If you have to work more during the school year to cover costs, you may have less time for your studies. That could put you at risk of taking longer to graduate — which costs more — or even dropping out.
Nancy Goodman, founder of College Money Matters, a nonprofit that aims to inform students and families about paying for college, said the higher rates should make you think twice about taking out a loan. Use an online loan calculator to do the math, she said, to see how much you would pay monthly for the amount you need to borrow to attend a given school.
She suggested considering less expensive state colleges, and making sure to graduate in four years to help keep costs down. Taking Advanced Placement or college-level classes while in high school may help you earn college credit. Graduating a semester early can save as much as $6,000, she said.
Ms. Goodman said a good rule of thumb is: Don’t borrow more in student loans over the four years of college than you expect to earn in your first year’s salary as a professional.
While it can be hard to determine that number, you can get a rough idea of what workers in various occupations earn from data on the Department of Labor website. Your choice of major also affects your eventual pay and how much debt you can expect to pay off after graduation, said Michael Itzkowitz, founder and president of the HEA Group, a consulting firm focused on college access and success.
Some majors are more likely to result in higher salaries, Mr. Itzkowitz said. The group published a spreadsheet on Thursday, based on April data from the Department of Education’s College Scorecard, of the average salaries for the most popular majors, as well as the highest-paying majors, four years after graduation. The top salaries — $90,000 and higher — are concentrated in majors like petroleum or computer engineering, computer science and pharmacy, while salaries in fields like the fine arts, studio arts, dance and theater are in the low- to mid-$30,000 range.
“Everyone needs to consider the cost of attendance in addition to what their potential salary might be,” Mr. Itzkowitz said. “Can you recoup your costs within a reasonable amount of time?”
Here are some questions and answers about student loans:
Is there a limit to how much I can borrow for college?
For federal student loans, the limit for dependent students is generally $5,500 for the first year, $6,500 for the second year and $7,500 for the third and fourth years. The cumulative cap, which accounts for extra years if needed, is $31,000. (Borrowing limits are higher for independent and graduate students.) For PLUS loans, the limit is as high as the institution’s cost of attendance.
Are rates rising for private student loans?
Private student loans are offered by banks and lenders other than the federal government, and their rates, which vary by lender, have also been rising. The loans typically require a credit check, and only borrowers with top-notch credit get the lowest advertised rates. Private loans may also have variable interest rates, which means your monthly payment can increase over time as rates rise. Advocates for student borrowers urge caution with private loans because they tend to be more expensive and lack the protections of federal loans, like payment plans adjusted to your income and the right to temporarily suspend payment in the event of setbacks like a job loss or illness. Also, federal borrowers who work in certain government and nonprofit jobs may qualify to have their debt forgiven after a period of time.
When does the pause on federal student loan payments end?
Payments on most federal student loans have been paused for the past three years because of the pandemic. But borrowers may be required to start repayment late this summer or early fall, according to guidance from the Federal Student Aid office.
Borrowers should be on the lookout for updates from the Education Department or their loan servicers, said Betsy Mayotte, founder of the Institute of Student Loan Advisors, a nonprofit group. She suggested that borrowers check what their monthly payments will be once payments resume. (To do so, look on www.studentaid.gov). If the amount is too high, they can use the department’s online calculator to see if a different payment plan may be available.
Borrowers should also make sure their servicer has their correct contact information, she said. Open all correspondence promptly. “With all the moving parts and changes in the works with student loans right now,” she said, “it’s even more important for borrowers to ensure they are up to date on what their responsibilities are.”
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FAQs
What will federal student loan interest rates be in 2023? ›
The new interest rates for 2023-24 federal student loans disbursed on or after July 1, 2023 will be: 5.498% for undergraduate Federal Direct Stafford Loans. 7.048% for graduate Federal Direct Stafford Loans. 8.048% for Federal Direct Grad PLUS Loans.
Are student loan interest rates expected to increase? ›Students borrowing for college in 2023-24 can expect a 5.50% federal student loan interest rate. Grad students and parents will face even higher rates. Eliza Haverstock is a lead writer and spokesperson on NerdWallet's education team, where she focuses on student loan repayment and college alternatives.
What will student loan interest rates be in 2023 2024? ›| Loan Type | 10-Year Treasury Note High Yield | Fixed Interest Rate |
|---|---|---|
| Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students | 3.448% | 5.50% |
| Direct Unsubsidized Loans for Graduate and Professional Students | 3.448% | 7.05% |
The interest rate on direct undergraduate federal student loans — which are determined by Congress each year — will increase to 5.5% from 4.99% for loans disbursed on or after July 1, 2023, an Education Department spokesperson confirmed.
How much more will the Fed raise interest rates in 2023? ›But policymakers also predicted in their economic forecasts that they might raise interest rates even further — to 5.6 percent by the end of 2023. That would amount to two more quarter-point rate increases over the course of the Fed's four remaining meetings this year.
Does the Fed plan to raise interest rates in 2023? ›Don't bank on that pause lasting forever. After voting to leave interest rates unchanged in a target range of 5-5.25 percent, policymakers on the Federal Open Market Committee (FOMC) caught Fed watchers by surprise when they announced that they're also penciling in two more rate hikes for 2023.
Will student loan interest rates go up in 2024? ›New Federal Student Loan Interest Rates Highest In Years
Borrowers who are currently in school, or will be in school during the 2023-2024 academic year, are set to see comparatively high interest rates on newly disbursed federal student loans.
If you currently have a federal student loan eligible for one-time debt relief and are thinking about taking out another, it could be wise to wait for the Supreme Court's decision before taking out a new loan. Student loan interest rates are expected to rise during the 2023-2024 academic year.
What will student loan interest rates be when they resume? ›If you're still borrowing for your education, the federal student loan interest rate for undergraduates is 5.50% for new loans taken out for the 2023-24 school year, effective from July 1, 2023 to June 30, 2024. Federal rates for graduate student loans and PLUS loans are higher — 7.05% and 8.05%, respectively.
What is the projected Fed rate for 2024? ›Both estimates are largely in line with fresh projections from officials in March. The Fed penciled in a 5-5.25 percent peak interest rate for 2023, after which officials see rates falling to 4.25-4.5 percent by the end of 2024.
Will the Fed keep rates high through 2024 2025? ›
It's not something the Fed intends to stop soon. Under the most recent projections, the real federal funds rate doesn't decline until the end of 2025, and even then remains above the central bank's current estimate of "neutral," meaning it is still high enough to put the brakes on the economy.
Will student loans be offset in 2023? ›The student loan tax offset has been suspended through June 30, 2023. If you have federal student loans in default, your 2022 tax return won't be taken to offset your defaulted loan balance if you file your 2022 tax return by the filing deadline.
Will private student loan interest rates go down in 2023? ›Student loan interest rates are expected to rise during the 2023-2024 academic year.
What is the next Fed rate decision 2023? ›Investors are probably going to be most focused on how much higher interest rates are expected to rise this year. Many expect Fed officials to pencil in one more rate move — lifting the anticipated policy rate to a range of 5.25 percent to 5.5 percent at the end of 2023.
Will student loans go to 0% interest? ›Even if you opt out of the payment pause or make payments, 0% interest will be applied to your loans until the payment pause ends. *Borrowers with loans in default cannot resume auto-debit at this time. Learn about COVID-19 emergency relief and loans in default.
What will the Fed interest rate be in 2025? ›In the long-term, the United States Fed Funds Rate is projected to trend around 4.75 percent in 2024 and 3.50 percent in 2025, according to our econometric models.
Will interest rates go down in 2023 or 2024? ›Along those lines, organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.
What is the new student loan law in 2023? ›Specifically, the bill prohibits the President or the Department of Education (ED) from suspending or deferring federal student loan payments or the accrual of interest on such loans for borrowers with annual household incomes over 400% of the federal poverty line.
What are student loan interest rates going to be? ›Federal Student Loan Interest Rates
Between July 1, 2022, and June 30, 2023, federal student loan rates for new undergraduate loans are 4.99%.
Interest rates for undergraduate students increased from 2.75% in 2020-21 to 3.734% in 2021-22 and 4.993% in 2022-23.
Why is it so hard to pay off student loans? ›
Certain lenders may capitalize your interest or charge interest on top of interest, which results in higher charges. Capitalized interest can make it challenging to make a dent in your total student loan balance. If you're wondering, why do student loans take so long to pay off? Capitalized interest may be the culprit.
Why are student loan interest rates so high? ›Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can't seize a degree. So student loan interest rates are typically higher than secured loan rates because the lender's risk is higher.
Will student loans cause recession? ›While unlikely to cause a recession, it could cool consumer spending. The Supreme Court on Friday struck down the Biden administration program to forgive student debt for more than 43 million American borrowers at a cost of $400 billion.
Is canceling student loan debt poor economic stimulus? ›Not only would loan cancellation provide relatively little spendable cash to households, but the cash it does offer would be poorly targeted from a stimulus perspective. Stimulus dollars that are spent rather than saved provide a stronger boost to near-term economic output.
Why did i get a federal student loan refund check 2023? ›Why did my college send me a check? A refund check is money that is directly deposited to you by your college. It is the excess money left over from your financial aid award after your tuition and additional fees have been paid. Your college may send you a check or the money may be deposited into your checking account.
Will Biden extend student loan pause? ›Biden will not extend the payment pause again
As Young stated, the debt ceiling bill will lift the payment pause at the end of August. The Biden administration had previously planned to end the payment pause, at the latest, 60 days after June 30, which would be around August 30.
Among all existing borrowers, 5.8% is the average student loan interest rate. For new undergraduate loans, the current federal interest rate is 4.99%. All federal loan interest rates have been temporarily set to 0% until June 30th, 2023; 92.7% of all student loan debt is federal.
Is 10 percent interest high for student loans? ›Private student loan rates can be lower; variable rates start at 1.25% to 2.25% APR, while fixed rates start around 4.25% to 4.75% APR. On the higher end, private student loan rates can range up to 11.97% to 12.59% APR.
What are the interest rates for student loans in 22 23? ›Federal student loan interest rates are set to rise for the 2022-23 academic year, following the U.S. Treasury Department's 10-year note auction on Wednesday afternoon. The new rates will be 4.99 percent for undergraduate loans, 6.54 percent for graduate Direct Unsubsidized Loans and 7.54 percent for PLUS loans.
Is 6% interest high for a student loan? ›If you have good credit, you may be able to get a lower rate. The current private student loan default rate is 2%. Private lenders have been trying to lower student interest rates in the past few years. The overall average private student loan interest rate estimates generally range from 6% to 7%.
Which student loan has the highest interest rate? ›
| Loan type | 2022 –2023 | 2020 –2021 |
|---|---|---|
| Subsidized loans (undergrad) | 4.99% | 2.75% |
| Unsubsidized loans (undergrad) | 4.99% | 2.75% |
| Unsubsidized loans (grad) | 6.54% | 4.30% |
| PLUS loans (grad & parent) | 7.54% | 5.30% |
Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can't seize a degree. So student loan interest rates are typically higher than secured loan rates because the lender's risk is higher.
Why is student loan interest so high? ›Student Loans Have Longer Terms
For example, car loans tend to have repayment terms between two and seven years. But student loans have repayment terms as long as 20 years. Because the loan term is so much longer, lenders charge higher rates on student loans.
Interest rates on federal student loans are always fixed. These rates are set on July 1 each year for loans disbursed from July 1 to June 30 of the following year.