Federal student loan interest rates to rise from July 1

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Federal student loans will be more expensive in the 2021-22 academic year. Even so, borrowers will still see some of the lowest student loan interest rates last decade.

Interest rates on new federal undergraduate student loans will rise from 2.75% to 3.73% in 2021-22. Interest rates for student, alumni, and PLUS loans are determined by the Treasury’s 10-year bond auction in May, according to New America, a public policy think tank. The Treasury sells 10-year notes to raise money.

PLUS Loans or Direct Parent Loans for Undergraduate Students are federal student loans that parents can get to pay for college tuition. Graduate students can also get PLUS loans.

Interest rates on 10-year bonds fell last year as investors aggressively sought to keep federal debt safe amid the unfolding coronavirus pandemic. As a result, interest rates on federal student loans fell to historic lows in 2020.

Investors have moved their money out of federal debt since late last year, pushing interest rates higher, according to the Financial Times.

The federal student loan interest rate is set by adding the interest rate on the 10-year May issue of 1.68% to the margin set by Congress. Legislators vote on the size of the margin each year, and although it has yet to be set for 2021-222, the margin is 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 to graduate loans and 4.6 points to PLUS loans. Here are the higher rates for each type of federal student loan:

  • Direct Loans for Undergraduate Degree: 3.73%.

  • Direct loans for graduates: 5.28%.

While student loan interest rates are rising, they are low compared to the past decade, when they hit 5.05% for undergraduate students in 2018-19.

Federal student loan interest rates are fixed throughout the term of the loan, so loans made before July 1 will continue to carry an interest rate of 2.75% this school year. Currently, under the first COVID-19 relief bill, federal student loan interest rates are 0% and may be deferred until October 2021.

Impact of higher interest rates

Attraction of federal loans in the amount of US $ 5,500 for 2021-2022 – maximum loan amount for first-year undergraduate dependents – a standard 10-year semester will cost $ 1,098 in interest on a monthly installment of $ 55. That’s $ 3 more per month and $ 301 more general interest over the same loan taken 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 such loans. There are also no specific restrictions on the amount of the loan; rather, it is determined by the cost of going to school.

If a parent borrows about the average PLUS loan or $ 16,500 for a 10-year term at a 6.28% rate over the next year, the cost would be $ 186 per month and $ 5,762 in interest. That’s $ 9 more per month and $ 969 more interest on the same loan this year.

Federal and private student loans

Although interest rates on federal student loans will rise next year, borrowers should still use and exhaust federal loans. before contacting private lenders… Unlike private student loans, federal student loans do not require joint subscribers and all borrowers receive the same interest rate.

Interest rates on private student loans are usually higher than federal loans and depend on the borrower’s credit history and the length of the term. Private student loans are not included in any student loan forgiveness programs and are excluded from the current suspension of federal student loan payments.

But students should not apply for loans until they complete the Free App for Federal Student Aid – FAFSA – and heard from your college about scholarships, grants and other non-refundable assistance.

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