In the still of the night on July 1, unbeknownst to many, interest rates for new federal student loans climbed higher than they have since before the Great Recession. For students – and parents – these new rates could create a financial burden similar to a home mortgage, costing students over $3 billion in additional interest for loans taken out in this year alone.
Interest rates for undergraduate loans have increased to 6.53% this year, nearly a 19% increase over last year and a 44% increase from just five years ago. For graduate and parent borrowers, costs were raised to their highest levels in 18 years, with interest rates set over 9%. These higher interest rates could cost students over $3 billion in additional interest for loans taken out in this year alone.
Breaking it down
The increase in student loan interest rates will cost borrowers thousands of dollars – many thousands. As an example, let’s take an undergraduate student leaving school in 2025: their student loan for the final year of college will cost $466 more compared to the same loan taken out just one year ago. If they’re a grad student or a parent that signed up for the loan, their final year of student loans will cost $497 more.
“And these additional costs are for only one year of borrowing, so the true cost of the increased rates could be much higher,” the Consumer Financial Protection Bureau (CFPB) noted.
“Although student loan borrowers may be able to lower monthly payments through income-driven repayment plans, interest continues to accrue under most plans, and borrowers may be unaware of these repayment plans, have difficulty accessing them or, in some cases, may still struggle to make ends meet despite the availability of these options.”
Borrowers have options… a few
If you want to yell at someone about this, call your Congressional representatives because interest rates are fixed by a formula defined by Congress, unlike private loans like credit cards.
The Dickensian twist to this whole thing is that even if interest rates decrease for future student loan originations, the rate on federal student loans remains the same throughout the repayment period. That puts an extra hardship on borrowers who take on federal student loans this year, because they will always make higher payments than others who borrow at a lower interest rate.
“This leaves borrowers caught between two choices,” the CFPB says: “(1) a lower rate through private loans which could help them afford everyday essentials, but cost them the important protections that come with federal student loans, or (2) a loan with a higher rate that comes with the protections of a federal student loan.”
But watch out for the lies
The CFPB says that borrowers need to be extra, extra careful with what comes out of the mouths of private lenders because they may exaggerate the savings and benefits of their products.
“We recently observed instances where private student loan servicers improperly denied benefits to eligible borrowers and failed to honor legal protections afforded to all borrowers by law,” the agency said. “Additionally, borrowers frequently report problems they have with private student loans to the CFPB, such as improperly assessed fees, improperly denied deferment requests, frustration with ballooning balances, and misleading information during the origination and refinancing processes.”