Borrowing to pay for college is about to get more expensive: The interest rate on new federal student loans for undergraduates during the upcoming 2024-25 academic year will be the highest in 12 years.
The federal student loan interest rate will be 6.53% for undergraduate students, up from 5.5% for the current year. The interest rate has not been that high on any undergraduate loans since the 2012-13 school year.
Graduate students will see an 8.08% interest rate this coming academic year, up from 7.05%. And PLUS loans, which are available to both parents and graduate students, will come with a 9.08% interest rate, an increase from 8.05%.
The rates for graduate students and parents have not been as high since before July 2006, when the government started setting fixed rates for student loans. Prior to that, most federal student loans had variable rates.
The higher student loan interest rates will make it more costly for borrowers to pay back their debt – and could cause a problem for President Joe Biden who is working to win over as many young voters as he can before the November election.
To be clear, the president does not set the federal student loan interest rates himself. The rates are set annually and are based on the 10-year Treasury note auction held every May. The increase isn’t a total surprise since the Federal Reserve has kept the nation’s benchmark interest rate at a 23-year high as it waits for inflation to cool.
Biden has already canceled more federal student loan debt – nearly $160 billion – than during any other administration, but debt relief for college grads doesn’t make education less expensive for current and future students.
Still, Biden’s new student loan repayment plan, known as SAVE (Saving on a Valuable Education), could make it easier for current and future borrowers to pay off their federal student loan debt, despite the interest rate hike.
Launched last year, the income-driven repayment plan can lower monthly bills for enrolled borrowers and reduce the amount they pay back over the lifetime of their loans.
Plus, unpaid interest will not accrue as long as the enrolled borrower makes a full monthly payment. That means that a borrower’s balance won’t increase even if the monthly payment doesn’t cover the monthly interest.
The SAVE program is estimated to cost as much as $475 billion over 10 years, according to one estimate, and is facing legal challenges from two groups of Republican-led states that argue Biden doesn’t have the power to create the repayment plan.
Since the fall, the Biden administration has also been working on a set of new proposals to deliver relief to certain groups of borrowers. The proposals aren’t as broad as the student loan forgiveness program that Biden initially planned and was struck down by the Supreme Court last year.
But if successfully implemented, the new initiatives could cancel up to $20,000 for borrowers whose balances have grown due to unpaid interest on their loans, regardless of their income.
Those new proposals have yet to be finalized, but some could go into effect as soon as this fall.
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