By Colin Beresford | NerdWallet
Federal student loans will be more expensive for the 2021-22 school year. Even so, borrowers will still see some of the lowest student loan interest rates in the past decade.
Interest rates on new federal undergraduate student loans will increase from 2.75% to 3.73% for 2021-22. Interest rates for undergraduate, graduate and PLUS loans are determined by the results of the US Treasury Department’s 10-year note auction in May, according to New America, a policy think tank public. The Treasury sells 10-year notes to raise funds.
PLUS Loans, or Direct Parent Loans for Undergraduates, are federal student loans that parents can receive to help pay for their college education. Graduate students can also receive PLUS loans.
Interest rates on 10-year notes plunged last year as investors aggressively sought federal debt safety as the coronavirus pandemic unfolded. As a result, interest rates on federal student loans have fallen to historic lows in 2020.
Since late last year, investors have been pulling their money out of federal debt, driving interest rates up, according to the Financial Times.
The federal interest rate on student loans is set by adding the interest rate on the May 10 note, 1.68%, to the margins set by Congress. Lawmakers vote on margins every year and while these have yet to be set for 2021-22, margins are not expected to change from last year.
For undergraduate student loans, 2.05 percentage points will be added to the interest rate. For other loans, 3.6 points will be added for graduate student loans and 4.6 points for PLUS loans. Here are the highest rates for each type of federal student loan:
- Undergraduate Direct Loans: 3.73%.
- Direct Graduate Loans: 5.28%.
- MORE ready: 6.28%.
Although student loan interest rates are rising, rates are low compared to the past decade, when rates hit 5.05% for undergraduates in 2018-19.
Federal student loan interest rates are fixed for the life of the loan, so loans taken out before July 1 will still have that academic year’s 2.75% interest rate. Currently, under the first COVID-19 relief bill, federal student loan interest rates are at 0% and forbearance until October 2021.
Impact of rising interest rates
Borrowing $5,500 in federal loans for 2021-22 — the maximum loan amount for dependent undergraduate students — for a standard 10-year term will cost $1,098 in interest with monthly payments of $55. That’s $3 more per month and $301 more in total interest than the same loan taken out at this year’s rates.
The increase in interest rates will have a greater impact on borrowers who take out PLUS loans given the higher interest rates on these loans. There are also no specific limits on the amount of a loan; rather, it is determined by the cost of attending school.
If a parent borrows around the average for a PLUS loan of $16,500 for a 10-year term at 6.28% next year, the cost would be $186 per month and $5,762 in total interest. That’s $9 more per month and $969 more in total interest for the same loan this year.
Federal vs Private Student Loans
As interest rates on federal student loans rise next year, borrowers should still pursue and exhaust federal loans before turning to private lenders. Unlike private student loans, federal student loans do not require co-signers and all borrowers receive the same interest rate.
Interest rates on private student loans are generally higher than federal loans and depend on the borrower’s credit history and tenure. Private student loans are not included in any student loan forgiveness program and are excluded from the current pause on federal student loan repayments.
But students shouldn’t turn to loans until they’ve completed the free application for federal student aid — the FAFSA — and heard from their college about scholarships, grants, and other aid that doesn’t. do not need to be reimbursed.
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Colin Beresford writes for NerdWallet. E-mail: [email protected].