Federal Student Loan Interest Rates Will Increase in July: Here’s What You Need to Know

Last year, student loan interest rates hit an all-time low during the onset of the COVID-19 pandemic. As the world slowly returns to normalcy, student loan interest rates are back on the rise.

In this blog, we’ll discuss a few of the factors that lead to changing student loan interest rates, share a few ways students may be able to offset costs and answer common questions about what to expect.

Why Are Federal Student Loan Interest Rates Going Up in July?

In July of 2021, undergraduate federal student loan interest rates will increase from 2.75% to 3.73% for the 2021-2022 school year.

This is mainly because certain federal student loan interest rates are influenced by the sale of 10-year Treasury notes, a type of debt security the U.S. government issues to investors. These notes are an extremely stable investment, paying interest to their holders every six months. At the end of the 10-year term, holders are repaid the face value of the note.

In 2020, people sought safe ways to invest their money as the COVID-19 pandemic began to spread, and these low-risk investments were an obvious choice. Because so many people invested in this option, interest rates fell significantly, causing student loan interest rates to drop, as well.

As the economy slowly normalizes, investors are now willing to take slightly more risk, and fewer people opt for 10-year Treasury notes. Their interest rates are on the rise, and federal student loan interest rates are following suit.

How Much Will Interest Rates Go Up?

Fortunately, although federal student loan interest rates are on the rise, they’re still significantly lower than they have been in previous years. For example, three years ago, student borrowers paid more than 5% on their loan balances.

This year’s rates are still the lowest we’ve seen since the 2012-2013 school year when fixed subsidized federal loan interest rates dropped to 3.4%. Even then, however, fixed unsubsidized rates totaled 6.8%.

What About Private Student Loan Interest Rates?

Because private student lenders have private funding sources – think banks and online lenders – their student loan interest rates are calculated differently. Private student loan interest rates will not be directly affected by the federal change.

The major difference between private vs. federal student loans is that private lenders can determine their own interest rates and terms. They consider variables like market factors, the borrower’s credit history and debt-to-income ratio to determine which rates a borrower may qualify for.

Federal student loans qualify for some protections and programs, like Public Service Loan Forgiveness (PSLF), that private student loans do not. For that reason, many borrowers choose to take out the maximum in federal student loans, then cover remaining debt using private loans.

If you’re considering private student loans, it’s important to note that private lenders offer both fixed and variable rate loans, while federal lenders do not. Fixed loans offer one interest rate over a set period of time so that you can count on a consistent monthly payment. On the other hand, variable loans often offer lower initial interest rates but may change over time.

If you’re considering taking out private loans, speak with a financial advisor about whether fixed or variable student loans may be right for you.

Can I Take Out Next Year’s Loans Early?

With the expected increase in federal student loan interest rates, some borrowers wonder if they can take out loans ahead of time to lock in the current low rate. Because these interest rates are set for each academic year, however, it isn’t possible to take out loans early.

Instead, you may consider looking for other types of financial aid, like scholarships and grants, to help cover tuition costs and minimize your need for loans.

Will Student Loan Forbearance Continue?

As the September 30 administrative forbearance deadline approaches, some student borrowers also wonder if President Biden will extend the payment pause. For now, however, it’s best to plan as if student loan payments will resume in the fall.

What About Student Loan Forgiveness?

Borrowers’ eyes have been on the White House for the last several months, waiting to find out if President Biden will issue federal student loan forgiveness. While Biden has discussed forgiving $10,000 in federal student loans, the President has not yet taken official action to do so.

In April, Biden asked Education Secretary Miguel Cardona to put together a document regarding whether or not the President has the legal authority to forgive student loans through an executive order. He did not include student loan forgiveness in the latest stimulus bill, explaining that he would prefer to have Congress approve forgiveness rather than relying on an executive order, if possible.

Covering the Cost of College as Interest Rates Rise

If you’re concerned about affording college, you’re not alone. According to CollegeBoard, the average cost of attending a public four-year institution during the 2020-2021 school year was $26,820, and the costs of a private four-year education were more than double that, at $54,880.

If you’re looking for a few options to help offset the cost of college, here are a few avenues to explore:

Start With the FAFSA

Before you start looking into student loans, begin by filling out the Application for Federal Student Aid (FAFSA). This application will determine the types of federal financial aid you may be eligible for. Many schools and organizations also use the information from this form to assess aid distributions, as well!

Scholarships & Grants

Scholarships and grants are a fantastic way to help fund your college education, and they’re available from many different places! You can apply through websites like FastWeb and Scholarships.com or even check organizations you’re already a part of to see if they offer financial aid opportunities.

Research Work-Study Options

If your college offers a work-study program, this can be a huge help in paying for college. Some programs enable you to work a part-time job related to your field in exchange for assistance with your tuition and school fees.

Bottom Line

Yes, federal student loan interest rates are going up. However, they’re still relatively low compared to recent years.

If you’re concerned about the costs of college, don’t let federal student loan interest rates hold you back from exploring your options. You can pursue forms of aid like scholarships and grants, work-study opportunities and federal aid, as well as private student loans, to help make up the difference.