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Why student loans will be more expensive in 2022-2023

The upcoming federal undergraduate student loan rate hike will mark a 1.26% increase from the previous academic year.

As inflation continues to climb in the United States, the cost of everything from food to energy is rising with it. The consumer price index, the most widely used measure of inflation, rose 8.3% in April 2022 from a year earlier, according to the US Bureau of Labor Statistics.

In its most aggressive move in more than 20 years, the Federal Reserve raised its benchmark interest rate by half a percentage point on May 4 in an attempt to combat rising inflation.

The overall cost of buying a home rose as the 30-year mortgage rate in the United States hit its highest level in 30 years. Now, some headlines claim that it will soon be more expensive to take out a federal student loan too.

THE QUESTION

Are interest rates on new federal student loans expected to increase for the 2022-2023 academic year?

THE SOURCES

THE ANSWER

Yes, interest rates for new federal student loans are expected to increase for the 2022-2023 academic year.

WHAT WE FOUND

The increased interest rates will only apply to new federal student loans. Interest rates on federal student loans are always fixed, meaning they only apply to loans taken out for that specific year, Bankrate explains on its website.

In this case, it would be the 2022-2023 academic year, for which rates will be set as of July 1, 2022 for loans disbursed from that date until June 30, 2023.

Federal Perkins loans have a fixed interest rate of 5% and will not be affected by rising rates.

According to Bankrate, federal student loan interest rates are determined based on the “high yield from the last 10-year Treasury note auction in May, plus a margin that varies by loan type.”

Ten-year Treasury yields are bonds issued by the federal government that mature in a decade. Although the Federal Reserve does not set Treasury yields directly, they generally rise in tandem with Fed rate increases.

The range for student loan interest rates is determined by the bipartisan Student Loan Certainty Act of 2013, which became federal law in August of that year.

It sets the annual interest rate for direct subsidized and unsubsidized undergraduate loans at the 10-year high-yield Treasury bill rate, plus 2.05%. For unsubsidized graduate loans, the interest rate is fixed at the 10-year Treasury rate plus 3.6%.

The annual interest rate for PLUS loans, federal loans for graduate or vocational students and parents of undergraduate students, is set at the 10-year Treasury rate plus 4.6%.

All interest rates are also capped at a certain percentage by law: 8.25% for undergraduate loans; 9.5% for graduate loans; and 10.5% for PLUS loans.

On May 11, the Treasury sold 10-year notes at an interest rate of 2.94%. Here’s what that means for student loan interest rates in the 2022-2023 academic year:

  • 4.99% for undergraduate loans
  • 6.54% for graduate loans
  • 7.54% for PLUS loans

With the upcoming increase, the interest rate on undergraduate student loans will be at its highest level since 2018-2019. Federal Student Aid (FSA) data shows the rate in that academic year, before the COVID-19 pandemic began, was 5.05%.

The rate hike will also mark a 1.26% increase from the 2021-2022 academic year interest rate of 3.73%.

The U.S. Department of Education announced on April 6 that it is extending the suspension of student loan payments through August 31, 2022. This means that student loan payments are still temporarily suspended and the interest rate for loans is 0% at the moment.

It’s unclear whether President Joe Biden will further extend the payment break, though he has signaled he is seeking to forgive federal student loan debt.

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