Federal student loan interest rate increases

According to Forbes, the rate will increase by 1.26 percentage points for the next school year.

DENVER — The Federal Reserve has raised the student loan interest rate for the upcoming 2022-2023 school year. According to Forbes, the rate will increase by 1.26 percentage points. This is a 34% increase in the interest rate for undergraduate student loans over last year’s rate.

Metropolitan State University economics professor Alex Padilla spoke to 9NEWS about the impact the rate increase will have on incoming students.

(Editor’s note: This interview has been edited for context and clarity.)

9NEWS: Why are we seeing such an increase right now?

Padilla: The main objective of the current administration is to try to control inflation. We have an inflation rate that has not been this high for over 45 years. That’s over 9%, or about four to five times what economists recommend in terms of a new inflation rate. This therefore means that prices increase each year, significantly, which reduces the purchasing power of consumers.

Is this a significant increase in interest rates compared to past years?

Padilla: Yes, 34% is a significant increase, yes, but the goal is to get inflation under control, and one way to do that is to raise interest rates – not just student loans, but all types of loan products, to ensure that people consume less .

What impact will this have on students?

Padilla: This means that students will have to reconsider how they should finance their studies, and so instead of taking out a loan, they could go to work. So we may have an increase in the proportion of new students who will enter the labor market to be able to pay for their studies.

It is important to know that this only applies to new federal student loans. Current students who have taken out a loan in the past have a fixed interest rate for 30 years, in general. They are not affected by this increase in interest rates. Only new students are affected by this increase.

For these new students, if they want to go to school or university to pursue higher education, a college degree, they will have to decide whether or not they are going to take this loan or whether they are going to work. One of the consequences of this is that we are seeing a certain labor shortage in the United States and therefore we could alleviate this shortage a little.

But also, as students go to work to be able to pay for their education, it will give them on-the-job training. It will give them work experience, and it might motivate them to study harder because they don’t like the job they have now to pay for their education.

We will probably observe potential students who will delay their entry to university because salaries are currently increasing because of a labor shortage.

Another thing is that students might reconsider the type of specialization they are going to pursue for their studies, in the sense that although research shows that having a university degree is very beneficial, it is only an average. Prospective students might actually do their homework when it comes to starting salary, median salaries, and which degree pays the most after graduation, versus which degree pays the least.

Any advice for incoming students?

Padilla: Look at the data. What do the reports say in terms of unemployment rate and median age? Take a look at where you plan to live and consider your options.

So it’s a lot of homework, but it’s a big investment and sometimes you have to consider the fact that you don’t need to have a college degree to have a successful life. You don’t need a college degree to make a lot of money. It will be a different type of work. It will be a different kind of life. It will be a different level of comfort. If you’re going to have a college degree, what are you going to do with it? And what can you do with it? What kind of sacrifice are you going to make to get that college degree? Understand that it is not necessarily true that even if you are a successful graduate you will be able to earn a high income. The truth may be unpleasant, but the truth matters.

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Bernadine J. Perkins