Federal Student Loans are Set to Reach Their Highest Level in Over a Decade

Next year, the interest rate on many new federal student loans will rise to its topmost level in over a decade, as lenders across the economy appeal for higher returns for borrowing money.

Interest Rates for Undergraduate Loans Would Increase

On Tuesday, the U.S. Department of Education declared on its website that the interest rate for undergraduate loans would increase to 6.53% from 5.5%.
According to Mark Kantrowitz, a student loan expert, this translates to $113.72 per $10,000 borrowed, compared to $108.52 last year.

For graduate students, the rate will rise from 7.05% to 8.08%, which means $121.77 per $10,000 borrowed, up from $116.36.

These rate levels are identified by a set formula that adds percentage points to the recent yield on 10-year Treasury notes based on the loan type and beneficiaries.

The most current 10-year Treasury note auction yielded a rate of 4.483%. This 10-year rate is a benchmark mirroring investor danger appetite amid recent economic situations.

Currently, inflation is the major factor, leading lenders to seek higher rates to compensate for its impact.

It's ambiguous whether the Biden administration could interfere to freeze or lower the rates. In 2013, the Obama administration signed a binary bill to retroactively lessen rates.

Lessening the student loan concern is a key part of Biden's agenda, and he has brought in a new debt cancellation plan after the Supreme Court rebuffed a former one.

A Biden administration spokesperson did not instantly answer to a request for comment.

The new rates will not influence current student loans or private student loans, which generally have much higher interest rates.

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Breakdown Detailing the Interest Rates for Federal Student Loans

The Education Department's current statement on May 14 beacons a bizarre raise in federal student loan interest rates for the 2024-25 academic year. Here's a breakdown of the changes:

• Undergraduate direct loans will increase from 5.50% to 6.53%.
• Graduate and professional direct loans will rise from 7.05% to 8.08%.
• PLUS loans, available to parents and graduate students, will rise from 8.05% to 9.08%.

Since 2006, federal student loans have sustained steady interest rates. Notably, undergraduate direct loan rates haven't been this huge in 16 years, dating back to the 2008-09 academic year.

These forthcoming rate increases may worsen difficulties for students dealing with FAFSA processing lags, probably resulting in some to consider private loans with lower rates but fewer protections.

Higher interest rates will unavoidably increase the overall cost of college for the millions relying on loans. Federal student loan rates, effective from July 1 annually, remain fixed throughout the repayment time, commonly ranging from 10 to 25 years.

While these changes won't influence borrowers with older loans, they'll essentially influence those acquiring new federal loans.

This rise in rates comes at a time when the collective federal student loan debt stands at $1.6 trillion, with federal loans composing 93% of this total.

With the anticipated debt rise for 2024 high school graduates, reaching around $37,000 per student, more may turn to private loans to bridge monetary gaps, considering the capped federal loan limit for dependent undergraduates at $31,000.

Related Article: Student Loan Borrowing Costs Hit 16-Year High: What It Means for Borrowers and Colleges