On July 1, interest rates on federal student loans rose. Here’s what you need to know


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College tuition has gotten a bit more expensive for students (and parents) who plan to take out federal loans this fall. On July 1, 2021, the Federal Reserve raised interest rates for the academic year 2021-22 by almost a percentage point:

  • 2.75% to 3.73% for direct subsidized and direct unsubsidized student loans.
  • 4.3% to 5.28% for direct unsubsidized loans for graduate students or professional students.
  • 5.3% to 6.28% for Direct Plus loans for parent, graduate or professional students.

The growth came after last year’s record lows, as did pandemic coronavirus started. The table below shows the rates and fees for the upcoming school year.

Fixed interest rates on direct loans first paid on or after July 1, 2021, but before July 1, 2022.

Loan type

Borrower type

Fixed interest rate

Loan disbursement fee

Direct subsidized loans and direct unsubsidized loans



1.057% for loans first issued on or after October 1, 2020, but before October 1, 2022.

Direct unsubsidized loans

Graduate or professional


1.057% for loans first issued on or after October 1, 2020, but before October 1, 2022.

Direct Plus Credits

Parents and graduate students or professional students



As you navigate your additional education spending, here are a few more things to know about federal student loans.

Why are interest rates going up?

Since 2013, Congress has set federal student loan interest rates based on the government’s annual sale of 10-year Treasury bonds. The US Treasury sells promissory notes to investors to borrow the money it needs to close the gap between the tax revenue it receives and the amount it spends on raising capital and refinancing federal debt.

Each year in May, the maximum bid for a government bond auction represents the income that investors will receive over the next 10 years. The application also helps investors gauge economic growth, and the student loan interest rate directly correlates with the national forecast. A slow economy lowers interest rates and makes it cheaper to borrow money to study, while a growing economy pushes rates higher and makes borrowing more expensive.

When the pandemic began in early 2020, economic growth practically stalled and federal interest rates fell to an all-time low of 2.75%. This year Sale of treasury bondsthe high yield of 1.68% was almost 1 percentage point (0.98%) higher than a year earlier, which led to an increase in interest rates on loans.

Implications of higher rates for students and parents

A 1 percentage point increase in the rate means a few extra dollars a month in payments on a typical federal loan. The greater impact will be felt on the total amount of interest charged on the loan. In particular, parents and graduate students who borrow on Plus loans may experience additional stress by borrowing money for themselves or for their children’s education. This is because the Plus loan has a higher interest rate than other types of federal student loans.

For example, suppose a parent borrows $ 10,000 in Plus Loan to fund his sophomore son in 2021. Excluding registration fees, that’s about $ 5 more per month and $ 587 more interest over 10 years compared to the same loan taken out in 2020. Loan Plus also allows parents and graduate students to borrow money for a variety of expenses, including tuition fees. ; accommodation and meals; tuition fees and fees; and subsistence benefits. Of course, early repayment of the loan will lead to a decrease in the overall interest.

Choice of federal or private student loans

The interest rates we have discussed so far only apply to federal student loans. Another option is to take a loan from a private lender. Unlike government-backed funding, private lenders use a risk-based approach to determine the conditions and interest rates for a student loan, which may include your credit history and rating, your income, existing debt, and whether you have a co-author.

Depending on these factors, you can find a private loan with a lower fixed interest rate. However, keep in mind that private loans do not necessarily provide the same protection guaranteed by federal loans, including:

  • Repayment based on income: Your loan may qualify up to eight repayment options depending on how much you owe and your income after graduation. You can also extend the 10-year repayment period to 30 years if the lower payments fit your budget.
  • Debt forgiveness: There are several ways to write off federal loans. If you have an income-driven repayment plan, the government can cancel the balance of a loan that you paid back over 20-25 years. Many federal loans are also forgivable if you work in a teaching, nonprofit, or government sector. You can find out more about federal loan forgiveness at Federal Student Aid website
  • Difficulty options: Federal borrowers are eligible to defer or defer a student loan in the event of job loss, illness, injury, return to school, or assistance during a national emergency such as COVID-19.

How COVID-19 Relief Affects the Equation

You may be wondering why interest rates are rising while the US is still battling the pandemic. When asked about the rate hike, a U.S. Department of Education spokesman declined to comment, but directed us to Federal Student Aid web pages, including Interest rates on new direct loans and a detail page how federal interest rates are calculated

Although interest rates have risen this month, the Department of Energy has extended the pause in payments and interest on all federal loans and fees on non-performing loans until at least September 30, 2021.

In March last year, the Department of Energy expanded relief efforts to offer the same zero-interest pause to 1.14 million loan arrears under the Federal Family Education Loan Program. Between 1965 and 2010, the FFEL program provided insurance for federal student loans from private lenders, including Stafford loans, unsubsidized Stafford loans, Federal Plus loans, and federal union loans. While some of these loans remain private, others are owned by the Department of Energy following a default transfer to the government, or were purchased by the government during the 2008 financial crisis. This relief is retroactive until March 13, 2020, the US Department of Energy said. Press release and will protect over 800,000 borrowers whose tax refunds were at risk of forfeiture to pay off overdue student loans. In addition, borrowers whose tax refunds have been withdrawn or their salary has been increased in the last year will automatically receive a refund.

If you are unsure if you have an FFEL loan, you can call the Federal Student Services Hotline (1-800-4-FED-AID) or log in to the FSA. Web site with your FSA ID to find out who is servicing your loan.

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