Federal student loan interest rates increase July 1

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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 of the past decade.

Interest rates for new undergraduate federal student loans will rise from 2.75% to 3.73% for 2021-22.

PLUS loans, or direct Parent Loans for Undergraduate Students, are federal student loans that parents can receive to help pay for college. Graduate students can also receive PLUS loans.

Interest rates for the 10-year notes plunged last year when investors aggressively sought the safety of federal debt as the coronavirus pandemic unfolded. Since late last year, investors have moved their money away from federal debt, pushing interest rates back up, according to the Financial Times.

The federal student loan interest rate is set by adding the interest rate on the May 10-year note, 1.68%, to margins set by Congress. The margins aren’t expected to change from last year.

The higher rates include 3.3% for undergraduate direct loans; 5.28% for graduate direct loans; and for PLUS loans: 6.28%.

Interest rates for federal student loans are fixed through the duration of the loan. Currently, under the first COVID-19 relief bill, federal student loan interest rates are at 0% and are in forbearance until October 2021.

The increase in interest rates will have a bigger impact on borrowers who take out PLUS loans given the higher interest rates on such loans. There are also no specific limits on the amount of a loan; rather, it is determined by the school’s cost of attendance.

If a parent borrows around the average for a PLUS loan, or $16,500, for a 10-year term at next year’s rate of 6.28%, the cost would be $186 a month and $5,762 in total interest. That’s $969 more in total interest for the same loan this year.

While federal student loan interest rates will increase next year, borrowers should still pursue and exhaust federal loans before turning to private lenders. Unlike private student loans, federal student loans don’t require co-signers and all borrowers receive the same interest rate.

Interest rates on private student loans are typically higher than those on federal loans and depend on a borrower’s credit history and term length. Private student loans aren’t included in any student loan forgiveness programs.

But students shouldn’t turn to loans until after they’ve filled out the Free Application for Federal Student Aid — the FAFSA — and heard back from their college about aid that doesn’t need to be repaid.

Email: cberesford@nerdwallet.com.

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