Student loan interest rates will soon rise – here’s what it means for borrowers

Student loan interest rates are expected to rise in the coming months. Here’s what that means for millions of borrowers.

Interest rates on new federal student loans set to rise

Interest rates for new federal student loans are set by Congress. Current federal law ties interest rates to the 10-year Treasury yield plus a premium, and sets rates based on the year of disbursement. Interest rates on new federal student loans increase this summer for all newly disbursed federal student loans:

  • Federal Stafford student loan interest rates for undergraduates are expected to rise from 3.73% to 4.99%.
  • Federal Stafford Graduate Loan interest rates are expected to rise from 5.28% to 6.54%.
  • Federal PLUS loan interest rates are expected to rise from 6.28% to 7.54%.

Seemingly small changes in student loan interest rates can make a significant difference in the cost of repayment. For a federal student loan balance of $20,000, the interest rate change would result in additional interest of $252 per year. Over a standard repayment term of 10 years, an undergraduate student borrower with an initial balance of $20,000 would pay over $1,400 in additional interest at the highest rate.

The interest hike is expected to take effect on July 1, 2022.

Interest rates on most existing federal student loans are still set at zero — but that’s set to expire

It is important to note that the interest rate increases only apply to new federal student loans disbursed on or after July 1, 2022. Interest rates for older federal student loans disbursed by the U.S. Department of Education are fixed according to the interest rates fixed at the time of their disbursement (which, depending on the year and the associated rate, can be good or bad for the borrower).

However, interest rates on all federal student loans held by the government were temporarily set at zero for more than two years through the CARES Act, which also suspended all student loan repayments. This payment pause and interest freeze was recently extended by President Biden through August 31, 2022. Unless Biden further extends the relief, interest rates on all federal student loans held by the government will eventually return to their original fixed rates in September.

Biden administration considering some changes to student loan interest

Interest on student loans can be debilitating for borrowers. During most periods of non-payment (including some deferment periods, as well as forbearance and most grace periods), interest generally accrues. This leads many borrowers to owe much more than they originally borrowed when they begin to repay.

For student borrowers on an income-based repayment plan, which allows them to repay their loans using a formula tied to their income, their normal monthly payment may not even be high enough to cover all of the interest accrued each month. resulting in balanced growth.

To make matters worse, this accrued interest may be periodically compounded or added back to the principal balance. This can have a cumulative effect over time, resulting in substantial balance increases for some borrowers. Accrued interest can capitalize for a number of reasons such as entering repayment, changing repayment plans, failure to re-certify income under an income-based plan, or the end of an abstention.

The Biden administration is finalizing regulatory changes that would eliminate a number of interest capitalization events. “When compounding occurs, borrowers see balances grow faster as interest accrues on interest,” the Department of Education said in a statement last year. “Capitalization of interest is not common practice in other consumer financial products.” Administration moving forward with plan to eliminate interest capitalization for entry into repayment, exit from forbearance, modification of certain income-based repayment plans and entry into default .

Further Reading on Student Loans

Biden should permanently abolish interest on student loans, says key senator

Will student loan repayments really resume? Probably Not For A While – Here’s Why

40,000 student borrowers will automatically get ‘immediate debt cancellation’ – but questions remain

Who qualifies for student loan relief under Biden’s huge new income-based repayment expansion

Bernadine J. Perkins