As if we didn’t have enough problems with student debt already, it’s safe to say the situation could become worse for borrowers who take out student loans for the 2022-23 fall semester and beyond. This is due to interest rate increases announced for federal student loans, which come on the heels of the Fed hiking interest rates a few times already this year.
Of course, interest rates on private student loans will likely be going up too, although the exact rates offered by independent student loan companies later this year are unknown so far.
However, federal student loans come with fixed interest rates that are only adjusted once per year – and they’re based on the treasury rates from May. At the end of the day, this year’s adjustment will have dramatic impacts on how much interest future college students pay to service their debts.
Federal Student Loan Rate Increases For 2022-23
As you look over the student loan rate increases just announced for various types of federal student loans, keep in mind that these new rates only apply to borrowers who take 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 keep paying the same rate they locked in during the year they borrowed for school.
With that in mind, it’s important to note that interest rate increases for this year are fairly dramatic. In fact, they could easily cost individuals thousands of dollars in additional interest as they pay off their student loan debt.
The chart below shows the current rates for borrowers and how much they’ll increase for college students who take out federal student loans later this year.
How Much Will Rising Rates Cost You?
How much more future borrowers will pay for their student loans depends on several factors. For example, the type of federal student loan will impact your new rate, as well as how much student loan debt you owe and the repayment plan you choose. That said, there’s no doubt that higher rates always mean more money thrown toward interest over the long haul.
As an example, let’s say you are a dependent undergraduate student whose parents cannot obtain PLUS Loans. In this case, the limit of how much you can borrow within a school year is currently set at $9,500.
With the old interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate students, the monthly payment toward this one year’s loan amount works out to $94.97 on a standard, ten-year repayment plan. With last year’s interest rate of 3.73%, the borrower would fork over $1,896.23 in interest if they made only the minimum payment on this loan amount for 120 months.
However, boost the interest rate to 4.99% and the monthly payment on this single year’s borrowing limit goes up to $100.72. As a result, total interest charges over ten years increase to $2,585.90.
While paying an additional $689 and some change in interest over ten years may not seem like a big deal, keep in mind that this example covers just one year of student loan debt, and only up to federal student loan limits. Many borrowers take out more debt for subsequent years of college due to higher loan limits, and some borrowers have to fill in gaps in funding with private student loans to boot. Some people also go on to graduate school in order to pursue an advanced degree, and that leads to even more debt at even higher rates as a result.
Note: Rising rates doesn’t typically affect borrowers on income-driven repayment plans or those going for loan forgiveness. Since these loan payments aren’t based on the loan amount, the monthly payment should not be impacted. Furthermore, since the balance will be forgiven, if interest accrues, it doesn’t make a difference.
How To Handle Skyrocketing Rates On Federal Student Loans
First off, it’s important to note that payments are still paused and interest rates are still set at 0% for federal student loans due to the Covid-19 pandemic. This emergency deferment period is scheduled to last until at least August 31, 2022 at this point, although it could be extended again. Either way, these new rates won’t go into effect until the deferment period is allowed to lapse.
Also be aware that there’s not a lot you can do about rising interest rates other than try to minimize the impact after the fact. Some steps you could take to handle skyrocketing rates on federal student loans include:
- Fill out the FAFSA. Make sure you fill out the Free Application for Federal Student Aid (FAFSA) every year since this form helps you find out if you’re eligible for federal aid options you don’t have to repay, such as Pell Grants.
- Borrow less: This isn’t always possible, but you can consider using savings and other income you have to borrow less for higher education. The less you can borrow in federal student loans, the less interest you’ll pay no matter the rate.
- Attend a less expensive school: Decide whether the costs you’re planning to pay for higher education are reasonable or not. If you’re even having to wonder whether college is worth it, there’s a good chance it may not be.
- Apply for scholarships: Look for more last-minute financial aid and alternative funding options for school, including scholarships and grants you haven’t applied for yet.
- Make payments during school: If you are borrowing for school with unsubsidized loans that accrue interest right away, you can lessen your total interest charges by making interest-only payments while you’re still in college.
The Bottom Line
Interest rates on federal student loans are set to increase in a short amount of time, and more increases will likely come into play in future years as well. This ultimately means borrowers who take out loans for school will face higher monthly payments and higher total borrowing costs over time.
That said, there’s not a ton anyone can do about it other than minimize loan amounts and see what other types of aid they may be eligible for. And if you are starting to think attending college may not even be worth the cost or the time commitment, you may be right to wonder.