Student Loan Interest Rates Set To Rise This Fall

Interest rates on new federal student loans will jump by more than a full percentage point on July 1, 2022. This is the second time interest rates on federal student loans have increased during the pandemic.

The interest rates for loans disbursed during the 2022-2023 academic year will be:

• 4.993% for undergraduate Federal Direct Stafford loans, subsidized and unsubsidized, up from 3.734% in 2021-2022 and 2.75% in 2020-2021.
• 6.543% for graduate Federal Direct Stafford loans, up from 5.284% in 2021-2022 and 4.30% in 2020-2021.
  
• 7.543% for Federal Direct Parent PLUS loans and Federal Direct Grad PLUS loans, up from 6.284% in 2021-2022 and 5.30% in 2020-2021
  

The new interest rates apply only to new loans disbursed between July 1, 2022 and June 30, 2023. The interest rates on old loans will not change. Federal student loans have fixed interest rates, which do not change. 

The student loan moratorium temporarily set the interest rate on eligible federal student loans at 0% starting in March 2020. When this payment pause and interest waiver expires on December 31, 2022, federal student loans will return to their original interest rates. The payment pause and interest waiver may be extended further, since it seems unlikely that the White House will allow repayment to restart just two months before the mid-term elections. 

Editor's Note: The date of the payment pause was updated to reflect the latest changes.

Who Sets the Interest Rates On Federal Student Loans?

The interest rates for federal student loans are based on the high yield of the last 10-year Treasury Note auction in May, as specified by Congress in the Higher Education Act of 1965.

The high yield for the auction that occurred on May 11, 2022 was 2.943%, up from 1.684% in 2021 and 0.70% in 2020. The interest rates on federal student loans are calculated by adding fixed margins of 2.05%, 3.6% and 4.6% to the high yield.

The interest rates have increased in part because of moves by the Federal Reserve Board to control inflation. The Federal Reserve tries to control inflation by increasing the Federal Funds Rate. Since these efforts are unlikely to be successful, student loan interest rates are likely to continue increasing next year and the year after until supply chain issues resolve on their own.

What Will Happen With The Interest Rates On Private Student Loans?

Each lender sets its own interest rates on private student loans. 

Private student loans offer fixed and variable interest rate options.

Interest rates are usually based on an underlying index, such as the London Interbank Offered Rate (LIBOR) index, Secured Overnight Funding Rate (SOFR) index and Prime Lending Rate.  A fixed margin is added to the index rate to yield the interest rate that the borrower pays. The margin is based on the credit scores of the borrower and cosigner.

The interest rate on a variable-rate loan tends to float with changes in the index. Some lenders use a one-month average of the index rate, while others use a three-month average. The three-month index rates effectively phase in interest rate changes over a three-month period, while the one-month index is more immediate.

The interest rate on a fixed-rate loan is based not only on the current index rates, but also on projected future changes in the interest rate and the length of the repayment term. In a rising rate environment, a loan with a shorter repayment term will have a lower fixed rate than a loan with a longer repayment term.

Interest rates are currently at or near record lows. The lowest variable rate on private student loans for undergraduate students with excellent credit is 1.19%. The lowest fixed rate is 3.49%. These interest rates are likely to start increasing soon. 

Impact Of Interest Rate Increases

The monthly student loan payments will increase as interest rate increases, but not as much as you might expect. The new interest rates will increase the monthly student loan payment by about $5 per $10,000 borrowed, costing borrowers about $500 to $1,000 over the life of the loan.

Here's a couple examples - let's say you borrow $10,000.

Borrowing $10,000 For 10 Years

• At 3.734%, you'll pay $99.99mo, or $11,998.18 in total
  
• At 4.993%, you'll pay $106.03/mo, or $12,723.76 in total
  

That 1.25% rise in interest increased your monthly payment by $6.05, or $725 over the life of the loan.

Borrowing $10,000 For 20 Years

If we take the same example as above, but stretch the loan term out to 20 years.

• At 3.734%, you'll pay $59.21mo, or $14,208.83 in total
  
• At 4.993%, you'll pay $65.96/mo, or $15,829.66 in total
  

That 1.25% rise in interest increased your monthly payment by $6.75, or $1,620 over the life of the loan.

How To Lower Your Interest Rate

There are two ways to reduce the interest rates you pay.

One is to sign up for AutoPay, where your student loan payments are automatically transferred from your bank account to the lender each month. Most lenders will provide a 0.25% or 0.50% interest rate reduction as an incentive.

The other is to refinance federal student loans into a private student loan, if you can qualify for a lower interest rate. But, a private refi will cause you to lose the better benefits of federal student loans, such as longer deferments and forbearances, income-driven repayment, loan discharge and loan forgiveness options. The student loan moratorium has temporarily set the interest rates to zero on eligible federal student loans. Private student loans can’t beat that. In addition, policymakers are discussing broad student loan forgiveness, which may cancel $10,000 or more in federal student loan debt per borrower.

Sadly, borrowers cannot borrow loans for the 2022-2023 academic year early, to lock in the current interest rates.