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Borrowing federal student loans is about to get more expensive.
Federal student loan interest rates are tied to the 10-year Treasury bill and determined using a formula established by federal law. Following Wednesday’s 10-year Treasury bond auction, interest rates are expected to rise for the 2022-23 academic year.
The new fixed interest rates will be:
- 4.99% for direct subsidized and unsubsidized undergraduate loans
- 6.54% for unsubsidized graduate loans
- 7.54% for graduate and parent loans PLUS
The most recent rates, which only apply to new loans taken out for the specified school year, will take effect on July 1, 2022.
Interest rates on federal student loans in 2022-2023
New federal interest rates are reaching pre-pandemic levels. Here’s how they compare to federal student loan rates over the past five years.
But what do these rate increases look like in real dollars? Say, for example, you borrow $5,500 in unsubsidized loans, which is the maximum amount allowed for freshmen. At last year’s rate of 3.73%, you owed about $55 per month and paid a total of $1,497 in interest over a 10-year repayment period.
If you borrowed the same amount at the new rate of 4.99%, you would pay $3.33 more per month in interest, or almost $400 more over the life of the loan.
How do these new rates affect borrowers?
If you already have federal student loans, these increased rates won’t change anything — they only apply to new loans that students take out for the upcoming school year.
If you’re considering borrowing student loans in the next year, review your options. For many borrowers, federal student loans are probably still the best choice available. Most types of federal student loans do not require a credit check, and everyone who qualifies receives the same interest rate. This is a big plus for college students and young adults who may not yet have a strong credit history.
Plus, federal loans come with extra protection that you won’t find in the private market. You may be eligible for flexible repayment options, including income-contingent repayment (IDR) plans and extended forbearance and deferment options. There are also several federal rebate programs that may help you pay off some of your debt if you qualify.
Finally, federal student loan borrowers received additional benefits during the Covid-19 pandemic. Payments were suspended and interest rates were set at 0% from March 2020. Although these benefits are due to expire on August 31, 2022, private borrowers did not receive any such benefits during this period.
Should You Borrow Private Student Loans?
There are instances where private student loans can be beneficial. For example, private loans usually come with higher borrowing limits, so if you maximize your federal loan options, you can still get money for college by applying for private student loans.
Highly qualified borrowers (meaning those with strong credit and stable income) may also find better deals in the private market. Graduate students and parents of undergraduates face the highest interest rates and origination fees on federal loans. If you have a healthy financial history, you could potentially benefit from lower rates and fees with private student loans.
But be sure to weigh any savings against the loss of federal student loan benefits. If you later have difficulty repaying your loans, a private lender may not be able to do the same to help you.
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