Interest on Federal Student Loans Is Rising to 6.53%

This has already been a challenging year for college applicants, starting with problems with a crucial federal application that delayed financial aid offers. Now, students and families have more to worry about: The cost of college loans for the next academic year is rising at the highest rate in more than a decade.

The interest rate on new federal student loans for undergraduate students will be 6.53% starting July 1, up from 5.5% this year, the Department of Education announced last week.

Rates on graduate and professional student loans will rise to 8.08%. And rates on PLUS loans – extra financing available to parents of undergraduate students as well as graduate students – will increase to 9.08%.

Federal student loan rates are based on a formula, set by Congress, that calculates the high yield on the 10-year Treasury note at auction in May, plus an additional fixed rate, depending on the type of loan. The yield on the May 8 auction was 4.483%, plus an additional 2.05% for undergraduate student loans. (Last year’s Treasury auction yield was 3.448. Additional rates are higher for graduate and PLUS loans.)

Interest rates generally remained high as the Federal Reserve battled inflation. Still, new student loan rates seem especially high compared with just a few years ago, said Mark Kantrowitz, a financial aid expert. In the 2020-21 academic year, the undergraduate loan rate was 2.75%. Still, rates were as high as 14% in the early 1980s, Kantrowitz said.

The new rates apply to loans taken out from July 1 to June 2025 and remain fixed for the life of the loan. They do not apply to loans that students have already taken out.

The increase translates to about $5 extra on a monthly payment on $10,000 in debt over a 10-year repayment term, Kantrowitz calculated.

Fees are rising amid growing concerns about student debt and the high cost of college. As of early 2024, nearly 43 million borrowers hold an average of about $37,850 in federal student debt, according to Federal Student Aid, an office within the Department of Education.

In a survey published Thursday by the nonpartisan Pew Research Center, nearly half of American adults (47%) said a college degree was worth the cost, but only if someone didn’t have to take out loans to attend. Less than a quarter (22 percent) said the cost was worth it, even if someone had to take out a loan.

Pew also analyzed federal data and found that households headed by a young person with a high school education had a typical net worth of $30,700 in 2022, compared to $120,200 for those headed by a young graduate.

Michele Shepard Zampini, senior director of college affordability at the nonprofit Institute for College Access and Success, said students should keep new federal loan rates — and college loans — in perspective.

“The fees are higher than we would like, but that doesn’t hurt the deal,” she said. “I would never want to see someone not go to college just because it meant taking out federal student loans,” she added.

The institute advises borrowers to “borrow what they need” to cover costs and fully participate in college, Zampini said. In general, you can borrow up to $31,000 in federal loans as a graduate student who relies on your family to support you. (The amount you can borrow is limited each year and limits are higher for independent students.)

Some students may try to borrow significantly less, thinking they can work harder to cover the costs. But this often “works to the student’s detriment,” Zampini said, because students may have to work so much that they fall behind in class. “It’s definitely a balance.”

Students should compare the costs of different colleges and consider choosing less expensive alternatives — perhaps a public school instead of a private one — to manage their costs, Zampini said. Check a school’s graduation rates and career prospects. If students typically take more than four years to graduate, the degree will cost more money. (One place to look this up is the Department of Education’s online College Scorecard.)

The new, more generous federal student loan repayment plan, known as SAVE, offers a “safety valve” if you worry about paying off your loan, Zampini said. With SAVE, which stands for Savings for a Valuable Education, payments are based on income and household size. After making monthly payments for a set number of years – up to 10, depending on the amount borrowed – any remaining balance will be forgiven.

For some low-income workers, SAVE payments may be reduced to zero. And if the borrower’s monthly payment doesn’t cover the interest owed, the Department of Education will cancel the uncovered portion of the interest. The loan balance does not increase due to unpaid interest.

Saving in a 529 plan can help reduce the amount you borrow. A 529 plan is a tax-advantaged savings account designed to help cover college costs. Contributions to the accounts, named in part of the tax code, grow tax-free and can be withdrawn tax-free to pay for costs such as tuition, housing, meals and books. (There is no federal tax deduction for 529 contributions, but many states offer tax incentives.)

“529s are a good tool in the toolbox,” said Tony Kure, managing director for the Northeast Ohio market at wealth management firm Johnson Investment Counsel.

Kure recommends opening a 529 when a child is born to give as much time as possible for the funds to grow before college. If you have more than one child, he advises opening a separate account for each one.

Many 529 plans offer promotions or savings incentives during the month of May, so now is a good time to research accounts if you’re thinking about opening one.

Here are some questions and answers about student loans:

Look for total student debt that is less than your expected annual starting salary, Kantrowitz said. If your debt is less than your income, he said, you could pay off your student loans in 10 years or less. To get an idea of ​​how much you can earn, check the Department of Labor’s data on pay by occupation. Another place to look is a report on salaries based on college majors published last year by the HEA Group, a research and consulting firm.

Rates on some private student loans — those offered by banks rather than the federal government — may be competitive with the new federal rates for borrowers with excellent credit (a score of 780 or higher), Kantrowitz said. But private loans can be riskier because they lack the protections offered by federal loans, such as the ability to request a break in payments during a financial setback, payment plans tied to your income, and options for debt forgiveness.

Generally, you can deduct up to $2,500 in interest paid on federal and private student loans, even if you don’t itemize your return, Kantrowitz said.