With the academic year 2024-2025 on the horizon, students and parents across the nation are facing a significant financial update that could shape the future of educational financing. The interest rates on federal student loans will increase again, starting July 1, 2024, marking a pivotal shift in the cost of borrowing for education.
For borrowers, these rate increases underscore the importance of understanding how these rates are determined, their impact on borrowers, and strategies for responsible borrowing.
2024-2025 Federal Student Loan Interest Rates
The formula to set federal student loan interest rates is set by law. Unless Congress steps in, we can make a strong prediction on the rates for July 1, 2024.
For academic year 2024-2025 (July 1, 2024 – July 1, 2025), the interest rates will be:
| Loan Type | 2024-2025 Award Year |
|---|---|
| Undergraduate Federal Direct Stafford Loans (Subsidized and Unsubsidized) | 6.53% |
| Graduate Federal Direct Stafford Loans (Unsubsidized) | 8.08% |
| Direct PLUS Loans (for parents, and graduate and professional students) | 9.08% |
Historical Direct Stafford Loan Interest Rates
It’s interesting to see where interest rates were, just a few years ago, to compare them to the upcoming 2024-2025 year.
| Award Year | Direct Loans (Undergraduate) |
Direct Loans (Graduate) |
Direct PLUS Loans (Parent and Graduate/Professional Student) |
|---|---|---|---|
| 2023-2024 | 5.5% | 7.05% | 8.05% |
| 2022-2023 | 4.99% | 6.54% | 7.54% |
| 2021-2022 | 3.73% | 5.28% | 6.28% |
| 2020-2021 | 2.75% | 4.3% | 5.3% |
| 2019-2020 | 4.53% | 6.08% | 7.08% |
| 2018-2019 |
5.05% |
6.6% |
7.6% |
| 2017-2018 |
4.45% |
6% |
7% |
| 2016-2017 |
3.76% |
5.31% |
6.31% |
| 2015-2016 |
4.29% |
5.84% |
6.84% |
| 2014-2015 |
4.66% |
6.21% |
7.21% |
How Interest Rates Are Set
Interest rates are set by federal law and rely on the 10-year Treasure Note auction which took place on May 8, 2024. Once the auction occurs, the results are used in the formula to determine the interest rates for the upcoming year.
Can the Federal Student Loan Interest Rates Be Lowered?
There is a concern about the increased cost of living that is effecting every day life. If you're wondering if the rates could be lowered, to help combat the high cost of just about everything else, you are not alone. One of the only ways the federal student loan interest rates can be lowered would be from an act of Congress. As of publishing, this is what we anticipate the interest rates to be for the upcoming 2024-2025 award year. And at this time, we don't anticipate Congress to step in.
The Total Cost of Federal Student Loans
Beyond the daily cost of borrowing a loan, the interest charged, federal student loans also charge origination fees. There has been discussion of removing origination fees from federal student loans, but no changes have been approved.
The additional costs depend on the type of loan borrowed. The origination fee is deducted from the total amount you borrow. What does that mean? If you were to borrow a $5,000 Direct Unsubsidized Loan, the total amount used to help pay your college costs would be, $4,921.50. That's because the $5,000 would remove the $78.50 origination fee from the amount paid to your account.
| Loan Type | Date of First Disbursement | Origination Fees |
|---|---|---|
| Direct Subsidized and Direct Unsubsidized Loans | Loans first disbursed on or after Oct. 1, 2020 through Sept. 30, 2024 | 1.057% |
| Direct PLUS Loans | Loans first disbursed on or after Oct. 1, 2020 through Sept. 30, 2024 | 4.228% |
The Impact on Student Loan Repayment
Direct Subsidized Loan for an undergraduate student
Loan amount: $5,000
Repayment term: 10 years
Repayment plan: Standard 10-year Plan
| 2022-2023 Interest Rate of 4.99% | 2023-2024 Interest Rate of 5.50% |
2024-2025 Interest Rate of 6.53% |
|---|---|---|
|
Monthly payment: $53.01 Total interest paid in 10 years: $1,361 Total cost of the loan: $6,361 |
Monthly payment: $54.26 Total interest paid in 10 years: $1,511.58 Total cost of the loan: $6,511.58 |
Monthly payment: $56.85 Total interest paid in 10 years: $1,822.04 Total cost of the loan: $6,822.04 |
* 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.
Borrowing Responsibly in a Changing Financial Landscape
In this evolving economic environment, the principle of borrowing responsibly has never been more important. Students and parents who plan to borrow for the upcoming year should carefully consider the total cost of borrowing when planning for college expenses. Exploring additional funding sources, such as scholarship, grants, tuition payment plans, and work-study, can help mitigate the impact of rising loan costs.
For those already managing student loans, exploring repayment options and strategies, such as income-driven repayment plans, or forgiveness opportunities, can offer pathways to manage debt more efficiently.
The 2024-2025 academic year has already created headaches for many students and families. Many students are just receiving their financial aid award letters due to the FAFSA Fiasco, and the news of increased student loan interest rates isn’t doing much to ease the stress of the upcoming year. However, understanding student loan interest rates, and the costs of federal student loans for the 2024-2025 academic year will help students navigate this landscape more confidently. Use this as an opportunity to make informed decisions this upcoming year.