College students who are returning to campus this fall are looking at higher interest rates on their federal student loans.
The fixed rate for Direct PLUS loans, which can be taken out by parents and graduate or professional students – rose to 6.28% from 5.3%.
Remember, the new rates do not apply to private student loans or to federal student loans that were taken out earlier to attend college.
What seems like a hefty hike, though, needs to be put into perspective. Kind of like the groaning over rising gas prices at the pump this summer. Just a year ago, we were talking about federal student loan rates dropping to historic lows.
The economic upheaval during the pandemic last year caused all sorts of prices to plummet – and now we’re shocked to pay more as the economy recovers.
“Last year’s interest rates were at or near record lows,” said Mark Kantrowitz, a student loan expert and author of “How to Appeal for More College Financial Aid.”
Kantrowitz noted that the 3.73% interest rate for undergraduate federal student loans is still low compared with 4.529% in the 2019-20 school year and 5.045% in 2018-19 school year.
By contrast, he said, the most recent peak in rates took place from the 2006-07 school year through the 2012-13 academic year when the interest rate on unsubsidized Federal Direct Stafford Loans was 6.8%.
The latest student loan rates remain a good deal, Kantrowitz said, and are actually the fourth-lowest rates in the last decade.
Rates went up due to swings in the bond markets. Federal student loans are pegged to the yields on the last 10-year Treasury note auction in May, which was when inflation worries surged.
To be sure, yields on the 10-year Treasury note sunk in early July but that won’t help the federal student loan rates for new loans, which reflect rising yields a few months ago.
Some experts blamed snap this site the recent drop in Treasury yields – which fell to the lowest point since February on July 7 – on fears that the economic recovery won’t roar along at a fast clip.
How much can you borrow?
So it’s best to think initially about where you can cut costs and pick up extra cash. Even now, there could be time to find a job or work more hours this summer to hold down debt.
A good rule of thumb is to aim to have total student loan debt at graduation that is less than your annual starting salary.
Undergraduates can borrow between $5,500 and $12,500 in federal student loans each academic year. The maximum will depend on your year in school and whether you’re a dependent or an independent student.
Often, parents can borrow more money through a federal Direct PLUS Loan. The maximum Direct PLUS Loan amount that one may borrow is the cost of attendance, minus other financial aid received.
Graduate or professional students can borrow a maximum of $20,500 a year in federal Direct Unsubsidized Loans, which have a rate of 5.28%.
Will the 0% period get extended?
Borrowers who are out of school and making payments on their student loans might hope that another extension of pandemic-related relief is around the corner.
But many people who already have federal student loans would be better off planning as if they’ll be required to resume making payments as of Oct. 1, according to Robert Humann, chief revenue officer at Credible, which offers an online marketplace to shop for rates.
As part of the pandemic relief effort, student loan borrowers were allowed to suspend payments and be charged 0% interest on most federal student loans ever since .