Higher student loan rates for borrowers this fall
As if we didn’t have enough problems with student debt already, it’s safe to say that the situation could get worse for borrowers taking out student loans for the fall semester of 2022-23 and beyond. This is due to interest rate increases announced for federal student loans, which follow the Fed raising interest rates a few times already this year.
Of course, interest rates on private student loans will likely increase as well, although the exact rates offered by independent student loan companies later this year are unknown at this time.
However, federal student loans come with fixed interest rates that only adjust once a year — and they’re based on Treasury rates starting in May. Ultimately, this year’s adjustment will have a huge impact on the amount of interest prospective students pay to pay off their debts.
Federal Student Loan Rate Increases for 2022-23
As you look over Student Loan Rate Hikes Just Announced For various types of federal student loans, keep in mind that these new rates only apply to borrowers taking advantage of federal aid options for the 2022-23 school year. From there, the rate will be adjusted again in May 2023 for borrowers who take out loans in the 2023-24 school year. Either way, anyone with existing federal student loans will continue to pay the same rate they locked in for the year they borrowed for school.
With that in mind, it’s important to note that the interest rate increases for this year are quite dramatic. In fact, they could easily cost individuals thousands of dollars in extra interest when paying off their student loan.
The table below shows the current rates for borrowers and their increase for students who take out federal student loans later this year.
How much will rising rates cost you?
The extra amount that future borrowers will pay for their student loans depends on several factors. For example, the type of federal student loan will affect your new rate, as well as the amount of student debt you owe and the repayment plan you choose. That said, there’s no doubt that higher rates always mean more money spent on long-term interest.
As an example, let’s say you’re a dependent undergraduate student whose parents can’t get PLUS loans. In this case, the limit on the amount you can borrow in one school year is currently set at $9,500.
With the old interest rate for Subsidized Direct Loans and Unsubsidized Direct Loans for Undergraduates, the monthly payment for the one-year loan amount equals $94.97 on a standard repayment plan ten years old. With an interest rate of 3.73% last year, the borrower would pay more than $1,896.23 in interest if he only made the minimum payment on that loan amount for 120 months.
However, increase the interest rate to 4.99% and the monthly payment on the borrowing limit for that year alone rises to $100.72. Therefore, the total ten-year interest expense increases to $2,585.90.
While paying an extra $689 and some variation in interest over ten years might not seem like a big deal, keep in mind that this example only covers one year of student loan debt, and only up to federal limits. student loans. Many borrowers take on more debt for later years of study due to higher loan limits, and some borrowers must fill funding gaps with private student loans to get started. Some people also pursue higher education in order to pursue higher education, which leads to even more debt at even higher rates.
To note: Rising rates generally do not affect borrowers on income-oriented repayment plans or those opting for loan forgiveness. Since these loan payments are not based on the loan amount, the monthly payment should not be impacted. Also, since the balance will be forfeited, if interest accrues, it makes no difference.
How to Handle Skyrocketing Rates on Federal Student Loans
First, it’s important to note that payments are still on hold and interest rates are still set at 0% for federal student loans due to the Covid-19 pandemic. This emergency deferment period is expected to last until at least August 31, 2022 at this point, although it may be extended again. In any event, these new rates will only come into effect once the deferment period has been authorized.
Also be aware that there’s not much you can do about rising interest rates, other than try to minimize the impact after the fact. Some steps you could take to manage skyrocketing federal student loan rates include:
- Complete the FAFSA. Be sure to complete the Free Application for Federal Student Aid (FAFSA) each year, as this form helps you find out if you are eligible for federal aid options that you do not have to repay, such as grants. Pel.
- Borrow less: This is not always possible, but you can consider using your savings and other income to borrow less for your higher education. The less federal student loans you can borrow, the less interest you will pay, regardless of the rate.
- Go to a cheaper school: Decide whether the costs you plan to pay for higher education are reasonable or not. If you even have to wonder if college is worth it, chances are it’s not.
- Apply for scholarships: Look for more last-minute financial aid and other school funding options, including scholarships and grants you haven’t applied for yet.
- Make payments during school: If you borrow for school with unsubsidized loans that earn interest immediately, you can lower your total interest costs by paying only the interest while you’re still in college.
Interest rates on federal student loans are expected to rise in the short term, and more increases will likely come into play in the coming years as well. This ultimately means that borrowers who take out loans for school will face higher monthly payments. and higher total borrowing costs over time.
That said, there is not much anyone can do except minimize loan amounts and see what other types of aid they may be eligible for. And if you’re starting to think that going to college might not even be worth the cost or time commitment, you might be right to ask.