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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. These rates will go into effect on July 1, 2022.
Federal student loan rates rise to pre-pandemic levels
Every May, federal student loans are given a new fixed interest rate for the upcoming school year. These rates are calculated by combining the high yield on the 10-year Treasury note with a fixed congressional premium of 2.05 percent. This process took place today, resulting in a rate increase for the upcoming year.
While experts predicted the rise in 10-year yields based on the Fed’s recent behavior, students who need to borrow for the next academic year could be surprised by the large increase in student loan rates.
Keep in mind that federal rates are fixed, so rate hikes impact only loans taken out for that specific academic year. Any federal student loans taken out previously will keep their interest rates from the time of origination.
Why the rate hike matters
With this increase, rates will now be the highest they’ve been since the 2018-19 academic year, prior to the COVID-19 pandemic. While an increase of a few percentage points may not seem like a large amount in the long run, a student loan calculator can show how much that increase affects the cost of the loan overall.
Let’s say you borrowed $10,000 in unsubsidized loans for your bachelor’s degree with a standard 10-year repayment term. If you borrowed for the 2021-22 school year with a 3.73 percent interest rate, you’d pay $11,996 over those 10 years. If you borrowed the same amount this upcoming school year with the 4.99 percent interest rate, you’d pay $12,722 over 10 years.
Why student loan interest rates are rising
With the U.S. economy under immense strain due to the COVID-19 pandemic, the Federal Reserve has already hiked rates by three-quarters of a percentage point four times this year in an attempt to reign in rapid inflation. As of December, the federal funds target range is 4.25-4.5 percent — the highest since 2008. And more hikes could be coming as the Fed fights to return inflation to a maximum of 2 percent.
While the Fed doesn’t directly set Treasury yields, yields typically rise alongside Fed rate increases. That means federal student loan rates are likely to increase again in May 2023.
How borrowers should respond
While this is a considerable rate increase, federal student loans are still often the best choice for college students. The rates set for the school year apply to all borrowers, regardless of credit score, and borrowers generally do not need a co-signer. While private student loans may advertise slightly lower rates, most borrowers will not qualify for those rates. Private student loans are also likely to see rate increases throughout the year.
Another big consideration is that federal student loans come with benefits that private student loans simply do not offer, such as opportunities for loan forgiveness and customizable repayment options. If you’re considering borrowing money for the upcoming school year, don’t let the new federal loan rates deter you; just remember to borrow the minimum amount you need for your education. The more you borrow, the more that interest rate will add to your total cost of borrowing.