Federal student loan interest rates are expected to rise for the 2022-23 academic year, following the US Treasury Department’s 10-year note auction on Wednesday afternoon. The new rates will be 4.99% for undergraduate loans, 6.54% for direct unsubsidized graduate loans and 7.54% for PLUS loans. These rates will come into effect on July 1.
Each May, federal student loans get a new fixed interest rate for the upcoming school year. These rates are calculated by combining the high yield of the 10-year Treasury note with a fixed congressional premium of 2.05%. This process took place last week, resulting in an increase in rates for the coming year.
While pundits predicted rising 10-year yields based on the Fed’s recent behavior, students needing to borrow for the next academic year may be surprised by the sharp rise in student loan rates.
Keep in mind that federal rates are fixed, so rate increases only affect loans taken out for that specific academic year. All federal student loans previously taken out will retain their interest rates from the time of origination.
Why rising rates matter
With this increase, rates will now be the highest since the 2018-2019 academic year, before the COVID-19 pandemic. Although an increase of a few percentage points may not seem like a big deal in the long run, a student loan calculator can show how much that increase affects the overall cost of the loan.
Let’s say you borrowed $10,000 in unsubsidized loans for your bachelor’s degree with a standard repayment term of 10 years. If you borrowed for the 2021-2022 school year with an interest rate of 3.73%, you would pay $11,996 over those 10 years. If you borrowed the same amount this coming school year with an interest rate of 4.99%, you would pay $12,722 over 10 years.
Why loan rates are rising
With the US economy under immense pressure due to the COVID-19 pandemic, the Federal Reserve has already hiked rates twice this year in an attempt to rein in rapid inflation. Although the Fed does not set Treasury yields directly, yields generally rise in line with Fed rate increases.
How Borrowers Should Respond
Although this is a considerable increase in rates, federal student loans are often still the best choice for students. The rates set for the school year apply to all borrowers, regardless of their credit score, and borrowers generally do not need a co-signer. Although private student loans may advertise slightly lower rates, most borrowers will not qualify for these rates. Private student loans are also expected to see rate increases throughout the year.
Another important consideration is that federal student loans come with benefits that private student loans simply don’t offer, such as loan forgiveness and customizable repayment options. If you’re considering borrowing money for the upcoming school year, don’t be put off by new federal loan rates. don’t forget to borrow the minimum amount you need for your studies. The more you borrow, the more this interest rate will increase your total cost of borrowing.