By Colin Beresford | NerdWallet
Two years ago, federal student loan borrowers enjoyed the lowest interest rates ever on their loans. This fall, rates for undergraduate borrowers will be nearly double what they were in 2020-21.
The interest rates for new undergraduate direct federal student loans are set to increase to 4.99% for the 2022-23 academic year, up from 3.73% last year and 2.75% in 2020-21. The interest rates on graduate direct loans are also set to increase to 6.54%; parent and grad PLUS loans will rise to 7.54%.
Since the new interest rates go into effect beginning July 1, any new loans taken out before then will carry the interest rates from the 2021-22 academic year.
Rising rates make college more expensive
Higher interest rates mean paying off loans will be more costly. For a dependent first-year undergraduate student, a $5,500 loan — the maximum this student could borrow — will cost $6,997 over the standard 10-year repayment term with an interest rate of 4.99%. At the 2020-21 rate of 2.75%, this loan would cost $6,297.
Those taking on graduate direct and PLUS loans will see the cost of borrowing swell even more. On top of higher interest rates, PLUS loans carry an origination fee of 4.23% and don’t have any borrowing limits.
According to the Hechinger Report, a nonprofit focused on education issues, the average PLUS loan in 2019 was around $14,000. That loan amount, taken on with the standard 10-year term and next year’s interest rate of 7.54%, will cost $19,977 over the life of the loan, including $5,977 in interest.
Interest rates for federal student loans are set by the Treasury Department’s May auction of 10-year notes. The interest rate on the May 10-year notes, 2.94%, is added to margins set by Congress, and those margins differ between types of federal student loans.
For undergraduate direct loans, 2.05 percentage points are added to the interest rate; graduate student loans have 3.6 points added and 4.6 points for PLUS loans.
Submit the FAFSA and consider the payoff
Increases to the federal student loan interest rates make it even more important to consider the payoff of college and whether any debt you take on is worth it.
Nonetheless, even with increased interest rates, federal student loans are the best option to finance your education if you need loans. Submit the Free Application for Federal Student Aid, or FAFSA, to be eligible for federal, state and school-based aid.
Submitting the FAFSA also allows you to be considered for grants and other aid you don’t have to repay, such as the Pell Grant. Once you’ve taken advantage of any aid you don’t have to repay, exhaust all of the federal student loans offered to you before opting for private student loans. Federal student loans offer more borrower protections.
The payoff of attending college will vary based on your major, the cost of attendance and the amount of debt that you have to take on to finance your education. If the payoff isn’t clear for you, consider alternatives to college or starting at a community college before transferring to a four-year school to attain your bachelor’s degree.
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Colin Beresford writes for NerdWallet. Email: email@example.com.