Federal student loans will be more expensive for the 2021-22 school year. Even so, borrowers will still see some of the lowest student loan interest rates in the past decade.
The interest rates on new federal student loans for Bachelor programs will increase from 2.75% to 3.73% for 2021-22. The interest rate on undergraduate, graduate and PLUS loans will be determined by the results of the Treasury Department’s 10-year bond auction in May, according to New America, a public policy think tank. The Treasury Department sells 10-year-old banknotes to raise money.
PLUS loans, or Parent Direct Loans for undergraduate students, are government student loans that parents can obtain to pay for college. PhD students can also get PLUS loans.
Interest rates on the 10-year debt have dropped over the past year as investors aggressively sought the safety of federal debt in the wake of the coronavirus pandemic. As a result, federal student loan interest rates fell to historic lows in 2020.
According to the Financial Times, investors have been withdrawing their money from national debt since the end of last year and driving interest rates back up.
The federal student loan interest rate is set by adding the interest rate on the May 10-year note, 1.68%, to the margins set by Congress. Legislators vote on margins every year, and while these have not yet been set for 2021-22, margins are unlikely to change from last year.
For student loans, 2.05 percentage points are added to the interest rate. For other loans, 3.6 points are added for student loans and 4.6 points for PLUS loans. Here are the higher rates for each type of federal student loan:
- Direct loans for Bachelor courses: 3.73%.
- Graduate Direct Loans: 5.28%.
- PLUS credits: 6.28%.
Although student loan interest rates are rising, the interest rates are low compared to the last decade when undergraduate student interest rates hit up to 5.05% in 2018-19.
Federal student loan interest rates are fixed for the life of the loan, so loans taken out before July 1 will still be subject to the 2.75% interest rate for that academic year. Currently, the interest rates for federal student loans under the first COVID-19 relief law are 0% and are tolerated until October 2021.
Effects of the rise in interest rates
Borrowing $ 5,500 in federal loans for 2021-22 – the maximum loan amount for first year dependent students – for a standard 10 year term costs $ 1,098 in interest on monthly payments of $ 55. That’s $ 3 more a month and $ 301 more in total interest compared to the same loan taken out at this year’s interest rates.
The rate hike will have a greater impact on borrowers taking out PLUS loans given the higher interest rates on such loans. There are also no specific limits for the size of a loan; rather, it is determined by the school’s participation costs.
For example, if a parent took the average on a PLUS loan, or $ 16,500 for a 10-year term at 6.28% interest for the next year, the cost would be $ 186 per month and $ 5,762 in total interest. That’s $ 9 more a month and $ 969 more total interest on the same loan this year.
Federal vs. private student loans
While federal student loan interest rates are set to rise over the next year, borrowers should continue to seek and seek out federal loans before contacting private lenders. Unlike private student loans, federal student loans do not require co-signers and all borrowers receive the same interest rate.
The interest rates on private student loans are usually higher than those on federal loans and depend on the borrower’s credit history and term. Private student loans are not included in any student loan cancellation programs and are excluded from the current state student loan payment hiatus.
But students shouldn’t seek credit until they’ve completed their free federal student grant application – the FAFSA – and heard from their college about scholarships, grants, and other unpaid grants.
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Colin Beresford writes for NerdWallet. Email: cberesford@nerdwallet.com.
The Federal Student Loan Rate To Rise July 1st article originally appeared on NerdWallet.
source https://collegeeducationnewsllc.com/federal-student-loan-interest-rates-to-increase-july-1st/
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