It’s about to get more expensive to borrow money for college, as interest rates on new federal student loans are set to climb this summer with the biggest percentage jump since 2013.
Interest rates on federal student loans will rise by more than a percentage point due to the Treasury Department’s auction of 10-year notes Wednesday. Rates on new federal student loans, which take effect July 1, were widely anticipated to jump as Treasury yields have risen in response to rate hikes from the Federal Reserve.
Although dire predictions of a larger increase didn’t exactly pan out, there will be a marked difference in borrowing costs for the 2022-2023 academic year. Undergraduate students will pay 4.99 percent in interest on new Stafford loans, up from 3.73 percent. Graduate students and parents who take on federal debt to help their children pursue a degree will see the interest rate on new PLUS loans rise from 6.28 percent to 7.54 percent.
The new rates are good only for loans taken out to pay for the 2022-2023 academic year and have no impact on existing education debt.
Because many families have to borrow money every year to cover the cost of college, annual increases in interest rates could become costly in the long run. Grad students may bear the brunt of the impact because of the high amounts of debt they take on. Unlike undergraduate loans, which are capped from year to year, graduate students can borrow up to the full cost of attendance.
Indeed, the vast majority of outstanding student debt derives from graduate studies, fueled by steady enrollment over the last decade. Graduate programs account for 40 percent of federal student loans issued each year, with borrowing increasing by $2.3 billion from the 2010-2011 academic year to 2017-2018. By comparison, borrowing for undergraduate programs declined by $15 billion during that period, according to the National Center for Education Statistics.
“If you’re a graduate student borrowing tens of thousands of dollars a year, this [rate increase] is more consequential than for an undergraduate in their first year, when the most you can borrow is $5,550,” said Jason D. Delisle, a senior policy fellow in the Center on Education Data and Policy at the Urban Institute.
He noted that while the percentage increase on federal student loans is the highest in nearly a decade, the actual interest rate on undergraduate loans is close to what it was in 2018. The difference, Delisle said, is rising rates may seem more salient now due to consumer concerns about inflation.
Interest on student loans, which can rise or fall from one year to the next, is based on the rate of the Treasury note plus a fixed margin. Congress set a ceiling to prevent federal student loans from becoming too costly. The interest on undergraduate loans can never go higher than 8.25 percent. Graduate loans are capped at 9.5 percent, while the limit on PLUS loans — for eligible parents as well as graduate and professional students — is 10.5 percent.
If nothing else, rising interest rates on federal student loans should force students to take a harder look at how much they are borrowing, particularly for advanced degrees, said Lynn O’Shaughnessy, a financial-aid expert and author of “The College Solution.”
While using debt to finance higher education can be an investment, there are rules of thumb to consider to avoid undermining the returns, she said. It still holds true that students at every stage of their postsecondary education should borrow no more than what they may reasonably earn in their first year after graduation, O’Shaughnessy said.
“What are you borrowing? What’s the return on investment for the degree program? You have to pay more attention to the total expense because the stakes are higher with the cost of college these days,” she said.
As the debate over broad student debt cancellation intensifies, reforms of the federal lending system have been largely absent from the conversation. Federal education debt has greater consumer protections and fewer eligibility criteria than private loans. However, critics say origination fees that can equal as much as 4 percent of the amount borrowed and limitless borrowing for parents and graduate students are onerous.