Breaking News: Rising Student Loan Rates

by Shannon Vasconcelos, former financial aid officer at Tufts University Attention high school seniors, continuing college students, and all of their parents: In news coming out of the U.S. Department of the Treasury today, we now know what federal student loan interest rates will be for the upcoming school year.  For students and parents borrowing loans between July 1, 2021 and June 30, 2022, interest rates will be as follows:

• Subsidized and Unsubsidized Direct Loans for undergraduate students: 3.734% (up from 2.75% in 2020/21)
• Unsubsidized Direct Loans for graduate students: 5.284% (up from 4.30% in 2020/21)
• Direct PLUS Loans for graduate student and parents of undergraduate students: 6.284% (up from 5.30% in 2020/21)

These rates represent an increase of almost 1% over last year’s historically low rates, costing the average undergraduate student loan borrower up to an additional $300-400 over the life of next year’s loan, based upon dependent undergraduate annual loan limits ranging from $5,500 to $7,500 per year. Unfortunately, the increase could cost undergraduate parent and graduate student borrowers fully funding a year of schooling through federal loans ten times that amount. Last spring, in the early days of the COVID shutdown, the Federal Reserve Board decreased interest rates to historic lows in an effort to stimulate the economy, and 2020/21 college loan rates responded in kind. Now, with the economy slowly returning to a more normal state, interest rates—including those of student loans—are rising, resulting in the 2021/22 rates noted above. The increase is unsurprising, yet still disappointing, for student loan borrowers. As always, students and parents should attempt to reduce borrowing as much as possible, by saving in advance, maximizing scholarship funding, and utilizing interest-free tuition payment plans. Despite lots of attention paid to recent high-profile proposals for student loan forgiveness, many obstacles still stand in the way of any large-scale forgiveness program, and forgiveness cannot be counted upon as an effective repayment strategy. Instead, choose your college carefully, budget sensibly, and borrow wisely, and your college investment is likely to pay off well into the future.