Planning to get a federal student loan this fall? Get ready for a higher interest rate

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For students planning to take on federal student loans for the upcoming academic year, please note that interest rates for new ones will rise by a percentage point from July 1 to more than 3.7% for undergraduate students. The change is due to the fact that interest rates on existing federal student loans are set at zero until the end of September as part of the fight against coronavirus.

While the new rates are still close to historic lows, rates are reset in early July each year in accordance with a federal law formula based on the high yield from the last 10-year Treasury bond auction in May, plus lending-dependent margins. This means that federal student loan interest rates will increase for all new loans issued between July of this year and June 2022, including those taken for the fall semester.

“These rates cannot be determined at your own discretion. To change the formula, Congress will have to pass legislation, which is unlikely, ”said student loan expert Mark Kantrowitz.

Loans may be lower than in past years, given that the percentage of 2021 high school students who completed the Free Application for Federal Student Aid or FAFSA to apply for college financial aid has dropped since 2020. according to the National College Education Network, down 5% from last year. To date, more than 1.9 million applications have been completed – a necessary first step towards obtaining a federal-backed student loan – by the June 30 deadline. Louisiana had the highest percentage of high school graduates – more than 72% of high school students, while Alaska had the lowest – 28.5%. The largest falls were in New Mexico and West Virginia.

College enrollment has been hit hard by the pandemic, especially among those just enrolling. Undergraduate enrollment in the spring of 2021 is down 5.9% from the same period last year, according to the nonprofit National Student Information Service. They found that undergraduate enrollment declined across all types of institutions, but community colleges were the hardest hit by 11.3%. The largest decline was observed among young people aged 18 to 20 years.

Student loans are now the second largest household debt in the United States, ahead of credit cards and car loans, but behind mortgage loans. Student debt has exceeded $ 1.7 trillion, according to the Federal Reserve. And while a number of progressive legislators are calling on the president to unilaterally cancel student loan arrears of up to $ 50,000 per borrower, the president did not include student loan forgiveness in his proposed $ 6 trillion federal budget.

What to expect

Federal rates for the coming academic year include a 1% increase for Federal Direct students on Stafford loans from 2.75% to 3.73%. While this is higher than last year at the height of the pandemic, the new rate is still lower than the rate charged to borrowers from July 2011 to 2012, when the rate was set at 3.4%, according to government data.

For Federal Direct Stafford alumni, loans this summer will rise just under 1 percentage point, from 4.30% to 5.28%. Federal Direct PLUS loan interest rate will increase from 5.30% to 6.28%. Interest rates will increase for loans for both graduate students and professional students studying at least part-time in the respective school or program, as well as for the parents of dependents of an undergraduate student enrolled at least part-time. According to government figures, these new rates for both Stafford Federal Direct Loan graduates and PLUS Graduates will remain lower than loan rates from at least July 2006 through last summer.

Repayment

Borrowers are not required to repay federal student loans until they graduate or drop out. In most cases, depending on the type of loan, borrowers also have another six months after graduation before the first payment begins. For those who demonstrate financial need, the government pays interest as long as borrowers are in school for at least half a working day.

Right now, student loans are free of interest and all borrowers have been automatically deferred, which means they temporarily do not need to make monthly payments due to the federal pause due to the coronavirus pandemic introduced last summer and extended earlier this year. …

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