Federal student loan rates to rise in July

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Students attending college in the fall will pay higher interest rates than last year on money borrowed to fund their tuition.

Interest rates on federal student loans for the upcoming academic year will rise by almost a percentage point from July 1 after falling for several years, according to analysis by financial aid expert Mark Kantrowitz.

However, bachelor loan rates hit an all-time low in the 2020-2021 academic year. Although rates are rising, he said, they are “still very low.”

At the auction in May, federal student loan interest rates are pegged to a 10-year Treasury bond, and the rate on that bond has risen since the pandemic raged.

According to Kantrovitz’s calculations, the rate on direct loans for bachelors will rise to 3.73% from 2.75%. Three years ago, the rate was just over 5%.

The new rate increases the interest expense on the 10-year loan by $ 549 for $ 10,000, or $ 4.58 a month, according to Kantrowitz, author of a book on applying for additional financial assistance.

The rate is rising amid a nationwide debate over whether some student debt should be canceled to help needy borrowers.

President Joe Biden has approved a federal debt write-off of up to $ 10,000 per borrower, while other Democrats are pushing for much broader relief. It is unclear if debt cancellation will happen, however, so students should not count on it as they think about how much to borrow, student debt experts advise.

“Discretion is always the best approach to student loans,” said Persis Yu, director of the student loan assistance project at the National Consumer Advocacy Center.

She said that students setting loan sizes for the next year and beyond should keep in mind why student debt has become such a hot topic: many borrowers are struggling to make their payments. According to Pew Charitable Trusts, over a million students defaults on their federal student loans every year.

Natalia Abrams, executive director of Student Debt Crisis, a group working to change higher education loan policy, advised students to “always take as few loans as possible.”

But the reality is that many students can’t avoid borrowing to go to college, says Michelle Streeter, senior policy analyst at the Institute for College Access & Success, a nonprofit group that is working to make college more accessible. The median published cost of attending a four-year public university as a state student is currently just under $ 27,000 per year in tuition, room, board, and other expenses, while the median post-grant cost is around $ 19,500, according to estimates. from the Council of Colleges.

And there are good reasons to take out loans: college graduates with a four-year degree tend to earn significantly more in their lifetime than workers with a high school diploma.

Students looking to obtain loans should focus on federal loans and strive to take the maximum federal loan allowance before considering private loans from banks or other non-government lenders, Streeter said. Private loans tend to be more expensive and lack the consumer protections that come with federal loans, such as repayment plans tied to the borrower’s income and deferral options when borrowers face financial problems.

According to the Student Debt Project, an institute’s college access initiative, nearly two-thirds of college graduates who graduated from college in 2019 had an average of about $ 29,000 in student loan debt. This is slightly below the 2018 average, continuing the trend towards a “relatively stable” level of student debt in recent years, the project said.

But the pandemic has turned many aspects of higher education upside down, and it remains unclear whether the rise in student debt will resume when the country begins to return to normalcy, a student debt project reported last year.

The US Department of Education has not officially announced the new student loan rates, but Kantrowitz calculated them using a government formula that adds an additional flat rate depending on the type of loan.

The rate on direct loans for graduate students will rise to 5.28% from 4.3%. The rate on PLUS loans, which are additional loans for parents and graduate students, will rise to 6.28% from 5.3%.

The new rates do not apply to private student loans.

Here are some questions and answers about student loans:

Can I now take out a loan for the next year to get lower rates?

Not. New federal student loan rates are set for each academic year commencing July 1, using a formula set by Congress. College loans are based on the information you provide on the Free Application for Federal Student Aid or the FAFSA.

The increase does not affect the rates on student loans already received. After setting the loan rate, they are fixed for the entire loan term.

How much can I borrow?

There are limits on the amount of money students can borrow in federal loans, annually and generally. Typically, first-year students can borrow up to $ 5,500, sophomores up to $ 6,500. For the third and fourth years, the limit is $ 7,500. The total limit is $ 31,000, higher than the cumulative annual limit in case a student takes more than four years to pursue higher education. The limits are higher for independent undergraduate and graduate students.

When will the current pause in student loan payments end?

In March 2020, as part of a government pandemic program, Congress allowed most federal student loan borrowers to temporarily stop monthly payments and set a zero interest rate on loans during the suspension. The suspension of powers has been renewed several times, most recently earlier this year when the Biden administration extended it until at least September 30. Some borrower advocates support another extension, but it is not known if this will happen.

Typically, so-called unsubsidized loans pay interest while the borrower is in college, but the aid plan also temporarily pays zero interest on these loans, “even while in school,” according to the Department of Education’s website.

The temporary zero interest rate is unlikely to have a significant impact on loans taken after June 30, Streeter said. A “short window” of no interest before payments resume on October 1 would mean the impact is likely to be negligible, she said.

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