Students headed to college need to prepare for an unexpected cost: taking out federal student loans is going to be more expensive this fall than it was last year.
The Treasury Department announced that starting July 1, interest rates for new federal student loans will increase by 1.26% percentage points, according to the National Association of Student Financial Aid Administrators.
Here’s what that means for new borrowers.
Each spring, Congress sets student loan interest rates for the following academic year based on notes from the 10-year Treasury auction that takes place in May, according to Bankrate, a financial guidance site.
Starting July 1, interest rates on federal student loans will rise significantly and will stay in effect through at least June 30, 2023, according to Forbes.
The 1.26% spike will bring rates on undergraduate student loans from 3.73% to 4.99% — which translates to a 34% increase, according to the current rates shared by the Department of Education.
For graduate students, interest rates on unsubsidized loans will rise from 5.28% to 6.54% – or about a 24% increase.
Rates on the PLUS loans — designed for parents of undergraduate students and graduate and professional students — will go from 6.28% to 7.54%, about a 20% increase.
“It will represent a pretty notable increase from one year to the next,” Greg McBride, chief financial analyst for Bankrate, told CBS news.
This is the biggest percentage jump on student loan interest rates since 2013, according to the Washington Post.
Bankrate explained that federal student loans are fixed — “meaning that the rate will not fluctuate for the life of the loan.” It also means the new rates only apply to loans taken out to pay for the 2022-2023 academic year and don’t impact existing federal loans. Private student loans will also not be impacted by this change since rates vary from lender to lender.
New student borrowers won’t feel the effect of the spike in interest rates immediately as the pause on student loan repayments fixed interest rates at 0% until August 31.
The spike also comes as millions of student borrowers await a decision from President Joe Biden on student debt cancellation.
In an April 25 news briefing, White House press secretary Jen Psaki said the president will make a decision before the end of the current pause on student loan payments.