New Federal Student Loan Rates Are Out – And They’re Higher

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Interest rates will be higher for most borrowers if you’re looking for a new student loan in the coming year.

Each June the government comes out with updated rates that apply to new federal student loans originated after July 1st and before the next July 1st. The rates are fixed for the entire loan term and set by federal law, not the Department of Education or any Administration.

Just as interest rates have increased for home mortgages, credit cards, and auto loans in the past few years, the same has happened with student loan interest levels. Here’s how rates from this year compare with rates for next year.

The current rates.

The new rates look like this. 

  1. Monthly Costs & Student Loan Length

Borrowers are generally expected to repay student loans over a 10-year period. This is called the Standard Plan. The term can be extended to as long as 30 years if several loans are combined. The longer the term, the smaller the monthly payments, BUT the higher the total interest cost.

According to Experian, the average student debt in 2023 amounted to $38,787. This is less than 2022 ($39,032) and 2021 ($39,487).

Borrow $38,787 at the old rate, 5.5% for undergraduate training, and the monthly payment is $420.94 over ten years. At this year’s interest rate, 6.53%, the monthly payment goes to $441.01. That’s a difference of $20.07 a month, or $241 a year.

But, let’s say you combine several smaller loans from 2023. If we say the amount is $38,787 and the rate is 6.53%, then the monthly payment falls to $338.52 over 15 years and $289.87 over 20 years.

Monthly cost reductions sound enticing, but always check the interest totals. Over 10 years the total interest cost is $14,134, over 15 years the interest cost jumps to $22,147, and over 20 years the interest expense amounts to $30,782.

  1. Student Loan Cautions

The usual concern with student loans is making the monthly payment. But, behind the scenes, there are more complicated issues.

It is possible to get a federal student loan without a credit check (except for PLUS Loans). On one hand, this is a necessity for most people who first enter college as teenagers, on the other, it’s a questionable idea because teenagers may lack the credit savvy to take on so much debt. 

The problem becomes especially acute for those who borrow money for school and do not graduate with a degree or certificate. Without the right credentials, it may be difficult if not impossible to enter certain fields and thus earn the money required to pay back student financing.

Consider these points.

First, borrow as little as possible. Look into every scholarship and grant program you can find. Remember, colleges have a retail price that shows published or “sticker” tuition rates, and the “net” cost after various reductions. Keep your eye on the net number.

Second, there are other costs to attend college in addition to tuition. Think of food, shelter, clothing, entertainment, health insurance, transportation, etc. How will such costs be financed?

Third, student debt can limit your ability to buy a house or car. When you make a big purchase, lenders will look at your debt-to-income ratio or DTI. If too much of your income is used for required monthly payments, lenders may decline your loan application. This is another reason to hold down student debt as much as possible.

Fourth, consider your educational options. State and local schools can often provide the training you want at a significantly lower cost. They can also be a gateway to more exclusive institutions and scholarships because borrowers now have a proven record with college-level courses.

Fifth, working part-time while in school can offset many costs.

Sixth, look into military service. The benefits are impressive, including free tuition.

  1. Private Loans

The interest-rate changes made each year apply to federal student loans. There are also private student loans available, with rates and terms established by individual lenders. Private loans can have fixed or variable interest rates, while federal student loan rates are fixed.

Prepayment penalties, a type of “gotcha” clause in the fine print, are prohibited in federal student loans but may show up with private financing. As always with any form of borrowing, it pays to shop around, understand all the terms, and get help from experienced borrowers and sources you trust.

  1. Perkins Loans

Loans originated under the Perkins Federal Student Loan Program were discontinued in 2017, thus many loans in this program continue to be outstanding. Their interest rate remains 5% fixed.

The Perkins Loan, according to the Consumer Financial Protection Bureau, was a low-interest, subsidized federal student loan. Students did not have to make payments or pay interest while in school or during the grace period after school. Such loans were available to undergraduate and graduate students with extreme financial need.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.