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College education just got a little more expensive for students (and parents) looking to take out federal loans this fall. On July 1, 2021, the Federal Reserve raised interest rates by nearly one percentage point for the 2021-22 academic year:
- 2.75% to 3.73% for direct subsidized and direct unsubsidized student loans.
- 4.3% to 5.28% for direct unsubsidized loans for college graduates or professionals.
- 5.3% to 6.28% for Direct Plus Parent, Graduate, or Professional Loans.
The increase comes after record lows from the previous year, as well asstarted. The following table shows the prices and fees for the coming school year.
Fixed interest rates for direct loans first paid on or after July 1, 2021 and before July 1, 2022
|Credit type||Borrower type||Fixed rate||Lending fee|
|Direct Subsidized Loans and Direct Unsubsidized Loans||Bachelor||3.73%||1.057% for loans first disbursed on or after October 1, 2020 and before October 1, 2022|
|Direct unsubsidized loans||Graduate or Professional||5.28%||1.057% for loans first disbursed on or after October 1, 2020 and before October 1, 2022|
|Direct Plus Loans||Parents and Graduates or Professionals||6.28%||4.23%|
As you navigate through the additional cost of education, here are a few more things to know about federal student loans.
Why are interest rates rising?
Since 2013, Congress has set federal student loan interest rates based on the government’s annual sales of 10-year government bonds. The U.S. Treasury Department sells bonds to investors to borrow the money needed to bridge the gap between tax revenue received and the amount it spends on raising capital and refinancing the national debt.
Each May, the highest bid on the T-Note auction represents the return investors will receive over the next 10 years. The offering also helps investors gauge economic growth, and the student loan interest rate is directly correlated with the national forecast. A slow economy lowers interest rates and makes it cheaper to borrow money for college, while a growing economy drives interest rates up and makes borrowing more expensive.
When the pandemic started in early 2020, economic growth slowed and federal interest rates fell to an all-time low of 2.75%. That year, the high yield on Treasury Notes sales of 1.68% was nearly 1 percentage point (0.98%) higher than last year, which resulted in a spike in lending rates.
Effects of increasing quotas for students and parents
A 1 percentage point rate hike means a few extra dollars a month in payments on a typical federal loan. The greater impact will be felt on the total accrued interest on a loan. Parents and doctoral students in particular who borrow via the Plus Loan could feel additional burdens when they borrow 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, let’s say a parent borrows $ 10,000 on a plus loan for a son’s second year 2021. Excluding the enrollment fees, that’s about $ 5 more per month and $ 587 more in 10-year interest compared to the same loan taken out in 2020. The Plus Loan also allows parents and graduates to borrow for a variety of expenses, including attendance costs; Room and board; Tuition and fees; and living allowances. Of course, early repayment of the loan would result in lower total interest rates.
Decision for government or private student loans
The interest rates we’ve discussed so far only apply to federal student loans. The other option is to take out a loan from a private lender. Unlike government-backed finance, private lenders use a risk-based approach to setting student loan terms and rates, which can include your credit history and score, income, existing debt, and whether or not you have a co-signer.
Depending on these factors, you may find a personal loan with a lower fixed rate. Be aware, however, that personal loans don’t necessarily offer the same protection that federal loans guarantee, including:
- Income-based repayment: Your loan can have up to eight repayment options, depending on how much you owe and what your post-graduate income will be. You can also extend the 10-year repayment period up to 30 years if lower payments are within your budget.
- Debt relief: There are some avenues to debt relief for federal loans. If you have an income-based repayment plan, the government can cancel the balance of a loan you’ve been paying for 20-25 years. Many federal loans are also forgivable if you are in an apprenticeship, community service, or public service. You can find out more about federal loan issuance on the Federal Student Aid website.
- Hardship case options: Federal borrowers are entitled to deferred or deferred student loans in the event of job loss, illness, injury, return to school, or relief during a national emergency such as COVID-19.
How COVID-19 relief goes into the equation
You may wonder why rates are rising while the US is still grappling with a pandemic. When asked about the rate hike, a US Department of Education representative declined to comment, but directed us to Federal Student Aid websites, including new direct loan interest rates and a page detailing how federal rates are calculated become.
Although interest rates rose this month, the DOE extended the payment hiatus and interest on all federal loans and recoveries on defaulted loans through at least September 30, 2021.
Last March, the DOE expanded relief efforts by offering the same zero-interest hiatus to 1.14 million borrowers with defaulted loans under the umbrella of the Federal Family Education Loan program. Between 1965 and 2010, the FFEL program insured federal student loans that were paid out by private lenders, including Stafford loans, unsubsidized Stafford loans, Federal Plus loans, and Federal Consolidation Loans. While some of these loans remain private, others are held by the DOE after being transferred to the government due to a default or were bought by the government during the 2008 financial crisis. This relief is retroactive to March 13, 2020, the DOE said in a press release, and protects more than 800,000 borrowers whose tax refunds could be confiscated to repay defaulted student loans. In addition, borrowers whose tax refund or wages were seized in the past year will automatically receive a refund.
If you’re not sure if you have an FFEL loan, you can call the Federal Student Aid Helpline (1-800-4-FED-AID) or log on to the FSA website with your FSA ID to find out who will take care of your loan.