Student Loan Rates Have Increased: What Does This Mean for You?

October 14, 2021

Student Loan Rates Have Increased: What Does This Mean for You?

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Anyone seeking federal student loans will face higher costs for the 2021-2022 academic year. An increased interest rate for student loans became effective July 1. As a result of the often high cost of college, millions of students and their families choose to borrow money to finance their higher education.

About 43 million U.S. residents currently have federal student loans. Their debt totals more than $1.7 trillion. On average, each student owes about $40,000. In the U.S., about 17.5 million undergraduate students are enrolled in college. And the average annual cost for an undergraduate degree is about $35,000.

Loans help college students pay for education-related expenses. These expenses typically include tuition, room and board, and books. They also can include supplies or transportation costs. With a student loan, the borrower can usually defer monthly loan repayments until finishing school.

The new, higher student loan rate applies through June 30, 2022. This guide explains how the rate changes may affect prospective college students. Continue reading to learn the new rates.

America's Student Loan History

America's current public student loan system dates to 1965. That year, President Lyndon Johnson signed the Higher Education Act into law. The legislation increased federal money for colleges and developed scholarships. The act also provided loans and opportunities for generations of students.

These programs started with good intentions. But the education, economic, and student loan rate landscape changed substantially in the last 60 years. The way colleges, students, and lenders pay for higher education in the 21st century has also changed. As a result, higher education is often very expensive, and people feel obligated to take on debt to pay for it.

As a result, according to one source, one in every 10 Americans defaults on a student loan.

Despite the cost, higher education has a good return on investment. People with a college degree benefit from improved job prospects, job security, and earning potential. In spite of that, according to a recent Harris Poll commissioned by CNBC, half of 1,000 U.S. adults surveyed between ages 33 and 40 with student debt said "their loans weren't worth it."

Deciding whether or not to take on student loans is a personal decision. In weighing the decision, students may also want to consider alternative strategies to pay for education. Strategies include seeking scholarships, getting grants, or requesting tuition waivers. Some professions pay for college tuition, such as roles in healthcare, education, or public service.

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Understanding Student Loan Rates

Congress sets federal student loan interest rates each May for the upcoming school year. The legislators base rates on 10-year U.S. Treasury notes. These debts pay interest at a fixed rate once every six months and pay the face value to the holder at maturity after 10 years. Treasury notes also serve as benchmarks for other types of interest rates, including mortgages.

All federal student loans have fixed interest rates. Rates on loans taken out before July 1, 2021 will not go up. In addition, loans taken out on or after that date have fixed interest rates.

The federal government first suspended student loan payments in March 2020. Loan repayments were set to resume Oct. 1, 2021. However, on Aug. 6, 2021, the Department of Education announced the Biden administration will extend the freeze through Jan. 31, 2022. In addition to pausing required payments, the federal government set loan interest rates to 0%.

Take a closer look below at the new interest rates. These rates apply only to several types of federally backed student loans. These recent changes don't apply to private student loans.

Undergraduate Student Loans



Both direct unsubsidized and direct subsidized student loan rates have increased. For a subsidized loan, the Department of Education pays the interest as long as a student attends school at least half time, during the first six months after leaving school, and during official periods of deferment. Undergraduate students with demonstrated financial need qualify for subsidized loans.

Graduate Student Loans



Students pursuing graduate education may choose an unsubsidized loan. Learners are responsible for paying the interest on this type of loan. A student's school decides how much money they may borrow. The school bases this decision on the cost of attendance and other financial aid degree-seekers might receive.

Direct PLUS and Grad PLUS Loans



A parent loan for undergraduate students, or PLUS loan, can help pay for education expenses not covered by other types of financial aid. Under this type of loan, a parent can take out a loan to cover their child's education expenses. Graduate and professional students may also use the Direct PLUS program to apply for a loan. When used for grad school, Direct PLUS loans are sometimes called Grad PLUS loans.

Perkins Loans

Perkins loans supported undergraduate and graduate students with exceptional financial need. The government stopped offering these types of loans in 2017. The final disbursements under this program ended on June 30, 2018. Regardless of the first disbursement date, all Perkins Loans have a 5% fixed interest rate. For more information about managing the repayment of a Perkins loan, contact the loan servicer or the school that originated the loan.

Consider using a student loan calculator to estimate your costs with the new federal loan rate.

Here's some examples: A first year dependent undergraduate can borrow up to $5,500 in direct, unsubsidized loans. Over a 10-year term of making $55 monthly payments, they'll also pay just under $1,098 in interest. That's about $300 more in interest compared to the previous rate.

Graduate students will also pay more. Borrowing $20,500 for a direct unsubsidized loan for graduate education will cost nearly $6,000 in interest at the 5.28% rate. That's about $1,171 more compared to the previous interest rate.

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