It's official, federal student loan interest rates were just announced for the upcoming 2022-2023 school year. Fair warning, it's not the most pleasant news and a bit of what we all expected, interest rates went up. This has been a common trend these last few months.
The new rates for federal student loans first disbursed on or after July 1, 2022, through June 30, 2023, will be:
| Direct Loans for Undergraduate Students (Subsidized and Unsubsidized) | Direct Loans for Graduate Students (Unsubsidized) | Direct PLUS Loans (Parent and Graduate/Professional Students) |
|---|---|---|
| 4.99% Fixed | 6.54% Fixed | 7.54% Fixed |
| Origination fee: 1.057% (for loans disbursed before Oct. 1, 2022) | Origination fee: 1.057% (for loans disbursed before Oct. 1, 2022) | Origination fee: 4.228% (for loans disbursed before Oct. 1, 2022) |
How Much More Will My Loan Cost?
This isn’t a small hike, interest rates essentially jumped up a whole percent. Direct undergraduate student loans first disbursed July 1, 2021, through June 30, 2022, have a fixed interest rate of 3.73%. That is a 1.26% increase for Direct undergraduate loans disbursed on or after July 1, 2022. That will make every dollar borrowed more expensive.
Important to note: if you have already borrowed federal student loans, your interest rate on those loans will not change. This interest rate hike only applies to new loans first disbursed on or after July 1, 2022.
Let’s look at an example of the impact of the interest rate:
Direct Subsidized Loan for an undergraduate student
Loan amount: $5,000
Repayment term: 10 years
| 2021-2022 Interest Rate of 3.73% | 2022-2023 Interest Rate of 4.99% |
|---|---|
|
Monthly payment: $49.98 Total interest paid in 10 years: $998.01 Total cost of the loan: $5,998.01 |
Monthly payment: $53.01 Total interest paid in 10 years: $1,361 Total cost of the loan: $6,361 |
* This example is showing the cost if no payments were made while in-school, and interest has not been capitalized to the outstanding principal balance.
Is It Possible to Lock in the Lower Rate?
If you’re looking for student loans to cover your Fall 2022 term, it’s too early for you to borrow your federal student loans and therefore unable to lock in the lower rate. There are strict rules colleges must follow, and they essentially must wait until almost the start of your term to disburse (apply to your account) your federal student loans. If your college term starts on or after July 1, 2022, your loans will likely have the 2022-2023 award year rates.
How Are Federal Student Loan Interest Rates Determined?
When it comes down to it, federal student loans have their interest rates set by Congress every year. The way the federal student loan interest rate is set is determined by law and there is a reliance on the current market. The reliance on the market has to do with the fact that interest rate calculation depends on the auction of the 10-year Treasury Note. Once that is determined, the federal interest rates are set.
MORE>>>How Does Student Loan Interest Work
How Can I Manage the Increased Cost?
The best way to manage the cost of loans it to limit the amount you borrow. It’s not too late to save money or find scholarships to help cover the costs of your upcoming year. Even if you can’t earn or win enough scholarships to cover your whole bill, you can always reject some of the federal student loan money offered to limit your borrowing and only borrow exactly what you need, not a penny more.
If you are borrowing money, it’s just a matter of understanding the true cost of the loan. You will not be repaying it back dollar for dollar; you will be repaying it dollar for dollar plus interest. Once you know what you will be borrowing, you can always use a student loan calculator to determine your estimated monthly payment.
MORE>>>Student Loan Calculator
Will Private Student Loan Interest Also Increase?
The way private student loans set interest rates is not affected by the way federal student loan interest rates are set. However, private student loans strongly follow current market trends. Over the last few months, the Federal Reserve has increased rates and has indicated they will raise rates again in the coming months. This will have an impact on all private credit lines, including private student loans.
It’s up to each lender to set their own loan terms, but we will likely see private student loan rate also increase over time. By the time Fall 2022 terms begin, private student loan borrowers may feel the affect of increased interest rates on the new loans they need to borrow for the upcoming year.
And your actual interest rate on private student loans will be dependent on the strength of your credit and the credit of your cosigner, if applicable. Private student loans may allow you to lock in terms for a short period of time before the money is disbursed, however, you can’t lock in too far in advance.