By now, you should have heard about this news. But if you haven’t, interest rates for new federal student loans will rise starting July 1st, 2021.
(In this video, let’s talk about this latest student loan news, and how it affects current and new student loan borrowers.)
As I was researching this matter, it became clear to me that there is actually a lot to learn regarding interest rates and federal student loans. When I took out mine back in 2017, I just accepted what I was getting for loans because I was very much in need of the money in order to get to school.
I knew a little bit about debt back then, which was “you need to pay it,” and about interest rates being the number one thing you have to look at when taking out loans. I didn’t knew that different federal loans have different interest rates on them. And I didn’t even know how the formula for the interest rates were determined and who determines it!
How are Interest Rates Determined?
Interest rates on federal student loans are set by Congress based on 10-year Treasury notes auctioned every May, plus a fixed increase with a cap, and are reset on July 1st. If you have taken out different federal student loans, like Stafford loans and PLUS loans, you’ll notice that they have different interest rates. That’s because the calculations used are also different.
So, for federal student loans made between July 1, 2021 and June 30, 2022, the interest rates will increase by a point. For the academic year 2021-2022, undergrad Federal Direct Stafford loans will be 3.73%, up from 2.75% in 2020-2021. Graduate Federal Direct Stafford loans will be 5.28%, up from 4.3% in 2020-2021. And Federal Direct Grad PLUS loans and Federal Direct Parent PLUS loans for 2021-22 will be 6.28%, up from 5.3% in 2020-2021.
If you’re a thinking of taking out federal student loans now in order to avoid that 1% rate hike, it won’t matter because the new interest rate will take into effect based on the loan’s disbursement date, which is most often after July 1, or when your school’s academic year starts.
But despite the increase, the new interest rates for federal student loans is still a low rate compared to previous years. Take a look at this graph for Undergraduate Federal Direct Stafford Loans beginning 2006.
You’ll notice that the highest rate since federal loans became fixed was at a high of 6.80% in 2006 to 2008. From there it declined to 3.40% in 2011 to 2013, climbed up to 4.66% and down back again to the 3’s and went as high up as 5.05% in 2018.
I have 4 federal student loans: 2 from 2017, and 2 from 2018. I got the highest and the 4th highest interest rate for federal student loans in 10 years. So, if you think this rate hike is bad, it’s not as bad if you really think about it. 3.73% is the 4th lowest rate in the last 10 years, while the lowest was in 2020-21 at 2.75%.
What does this mean for borrowers?
Since federal student loans are fixed, you’ll have the same rate when you took out those loans. You can’t change that rate anymore since it’s fixed. So for old borrowers, this change doesn’t affect you in any way unless you’re taking out new federal student loans this year.
If you’re taking out loans this year, this means that you would be paying an extra $1,098 on a $5,500 undergraduate student loan under a 10-year repayment plan.
What are My Thoughts on This?
Personally, I think this was inevitable. At some point, we will see interest rates go back up from increased consumer spending and debt, which could be a result of post-COVID market confidence. Plus, think about the 18-month forbearance we have right now. We stopped paying interest on these loans starting March of 2020 and we, borrowers, were very happy about that.
But the forbearance on federal student loans will end on September 30, 2021 and the government needs to replenish the crazy spending they just did, in order for us to not make any repayments throughout that time. And what better way to do that than with an increase in interest rates. We got free money this year and last year, now it’s time to pay up.