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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 note and determined using a formula set by federal law. After Wednesday’s 10-year Treasury note auction, interest rates are set 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 grad and parent PLUS loans
The most recent rates, which only apply to new loans taken out for the specified school year, will take effect on July 1, 2022.
Federal Student Loan Interest Rates in 2022-23
The new federal interest rates are rising to prepandemic levels. Here’s how they compare to federal student loan rates over the last five years.
But what do those rate increases look like in real dollars? Say, for example, that you borrow $5,500 in unsubsidized loans—the maximum amount allowed for first-year undergraduates. At last year’s rate of 3.73%, you’d owe about $55 a month and pay 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’d pay an additional $3.33 per month in interest, adding up to 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 borrow for the upcoming school year.
If you plan to borrow student loans in the next year, review your options. For many borrowers, federal student loans are likely still the best choice available. Most types of federal student loans don’t require a credit check, and everyone who qualifies receives the same interest rate. That’s a big plus for students and young adults who may not have a robust credit history yet.
In addition, federal loans come with added protection that you won’t find in the private market. You could be eligible for flexible repayment options, including income-driven repayment (IDR) plans and extended forbearance and deferment options. There are also several federal forgiveness programs that could help you discharge a portion of your debt if you qualify.
Lastly, federal student loan borrowers have received extra benefits during the Covid-19 pandemic. Payments have been paused and interest rates were set at 0% beginning in March 2020. While those perks are set to expire on August 31, 2022, private loan borrowers received no such benefits during that time.
Should You Borrow Private Student Loans?
There are cases where private student loans can be beneficial. For example, private loans typically come with higher borrowing limits, so if you max out your federal loan options you can still secure money for college by applying for private student loans.
Highly qualified borrowers (that is, those with strong credit and stable income) may also find better deals on the private market. Graduate students and parents of undergrads face the highest interest rates and origination fees on federal loans. If you have a healthy financial history, you could potentially qualify for lower rates and fees with private student loans.
But be sure to weigh any savings with the loss of federal student loan perks. If you later have trouble repaying your loans, a private lender may not do as much to help you.
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