Student Loan Interest Rates Are About To Go Up: Here’s What That Could Mean For You

  • The United States Department of the Treasury has increased interest rates on federal student loans.
  • These rates will apply to new loans obtained on or after July 1, but not to existing loans.
  • A private lender may offer you a lower rate, but you will lose the benefits that come with federal loans.

The US Treasury Department recently announced that student loan interest rates will increase for the 2022-2023 school year. These new rates will take effect on July 1, 2022, and you cannot get any new student loans before then.

Here’s what you need to know about the new student loan rates and how they could affect your wallet.

Why are student loan rates rising?

Each May, the Treasury Department changes student loan rates based on the most recent 10-year Treasury note auction. The rate on Treasury notes has risen this year, so student loan rates are also rising.

Inflation has a big impact on the Treasury note rate. Last March, inflation grew at its fastest pace in 41 years. Therefore, it follows that the Treasury note rate, and student loan rates, are increasing.

What are the new student loan interest rates?

These are the new rates as of July 1, compared to last year’s rates.

These increases may not seem significant, but they will result in higher monthly payments. You could also pay hundreds more over the life of a loan.

Will this affect my federal student loans?

Yes, the new rates from the Treasury Department affect any federal student loans issued between July 1, 2022 and June 30, 2023.

Will this affect my private student loans?

No, not directly. The new interest rates only apply to federal student loans.

However, private lenders may raise their rates in response to this news, because their rates don’t have to be that low to compete with federal rates now.

“I would shop around, not just engage with a private versus federal loan or loan provider,” says Mark Reyes, a certified financial planner with personal finance app Albert. Comparing lenders can help you find the best rate; just know that private lenders don’t offer the same protections, such as student loan forgiveness through the government, that federal loans do.

How will this affect new loans versus existing loans?

Any new federal loans you take out between July 1, 2022 and June 30, 2023 will have these new interest rates. But the higher rates won’t apply to any loans you’ve already taken out.

Federal student loans are fixed-rate loans. This means that once you get the loan, your rate is fixed and never changes unless you refinance or consolidate your debt with new terms.

Would Biden’s student loan forgiveness apply to these new loans?

It is not clear. President Biden has spoken publicly about ideas for widespread student loan forgiveness, including writing off $10,000 in debt per borrower and limiting cancellation to people making less than $125,000, but has not put forward an official proposal. Nothing related to student loan forgiveness is official yet, so we don’t know what the parameters for cancellation would be.

How to lower interest rates on your student loan

New student loan rates are set in stone, so there’s no way to lower your rates for next year. But there are ways to take out less on student loans, which in turn means you’ll pay less in interest.

“Try to borrow the amount you only need for college, not the full amount you qualify to borrow. By borrowing less, you won’t pay as much long-term interest on your education,” says Reyes. “Maybe you qualify for $20,000 worth of student loans, but you do the math and you only need $15,000.”

It also says that you should contact your financial aid office if you have questions about your specific situation. She may find that she has other options to pay for school, like a scholarship or grant that doesn’t need to be repaid. The school might also have work-study opportunities.

Paying off your loans faster than required is another way to save money on interest. The amount of interest you pay is based on your principal, so making extra payments toward your principal will lower the amount you pay in interest overall.

Making payments on any unsubsidized loans while you’re in school could be especially helpful in paying off your loans, Reyes says. With unsubsidized loans, interest accrues while you’re in school, so any money you can put toward these while you’re still enrolled will help you in the long run.

You might consider private student loans instead of federal ones. Some private lenders may offer lower rates, especially if you have a good

credit score

. However, Reyes says he must be careful when considering private lenders.

“With federal student loans come a lot of protections, like forbearance, income-based repayment plans, public service loan forgiveness, and the ability to have student loans forgiven by the government,” he says. Private student loans do not offer these benefits.

It’s also important to remember that interest paid on federal student loans may be tax deductible. You can deduct $2,500 or the full amount paid in interest during the year (whichever is less) if your modified adjusted gross income is less than $70,000, or $140,000 if you’re married filing jointly. You may still be able to deduct interest if you earn more, but a higher income means a lower tax deduction.

If you can’t find ways to lower the amount you pay in interest, it may not be time to worry yet. Reyes says it’s important to remember that student loans can be considered “good debt.”

“Student loans are not bad debt, as they can help you gain experience and potentially help you earn more in your life,” says Reyes. “So it’s more of an investment in your future.”

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