Well, this is a prediction I’m not happy I got right. Federal student loans first disbursed on or after July 1, 2023, will cost more than last year. With the current economic climate, it’s no surprise, however, that doesn’t mean students will be happy. Now more than ever, it’s important to make that budget and avoid overborrowing. Why…we’ll let’s break down the new rates.
Federal Student Loan Interest Rates 2023-2024
For the academic year 2023-2024 (July 1, 2023, June 30, 2024), the interest rates will be:
| Loan Type | 2023-2024 Award Year (July 1, 2023 - June 30, 2024) |
2022-2023 Award Year (July 1, 2022 - June 30, 2023 |
|---|---|---|
| Undergraduate Federal Direct Stafford Loans (Subsidized and Unsubsidized) | 5.50% | 4.99% |
| Graduate Federal Direct Stafford Loans (Unsubsidized) | 7.05% | 6.54% |
| Direct PLUS Loans (for parents, and graduate and professional students) | 8.05% | 7.54% |
Learn More >>> How Student Loan Interest Works
Federal Student Loans and High Interest Rates
These rates are just about the highest we have seen since 2006 , back when this years in-coming freshmen were toddlers. And what does that mean, well, every dollar borrowed is that much more expensive. And when we’re talking about repayment plans that take up to 20 or 25 years to repay, that can add up over time. My advice, never borrow a single dollar more than you absolutely need.
Comparing Interest Rates: 2021-2022, 2022-2023, and 2023-2024
Direct Subsidized Loan for an undergraduate student
Loan amount: $5,000
Repayment term: 10 years
Repayment plan: Standard 10-year Plan
| 2021-2022 Interest Rate of 3.73% | 2022-2023 Interest Rate of 4.99% | 2023-2024 Interest Rate of 5.50% |
|---|---|---|
|
Monthly payment: $50 Total interest paid in 10 years: $998 Total cost of the loan: $5,998 |
Monthly payment: $53 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: $1,512 Total cost of the loan: $6,512 |
* 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.
Managing a Federal Student Loan with a High Interest Rate
When it comes to federal student loans, unless you refinance out of the program, you’re kind of stuck. There is no such thing as “refinancing” for a better rate in the federal student loan program. And refinancing out of the federal program into the private student loan program would result in a loss of a multitude of federal benefits.
Here are the top 4 things to consider before you borrow:
- Pandemic Relief and Student Loan Relief. Direct Loans have their interest rates set to 0%. while these loans are receiving pandemic relief. If a student borrows a loan on July 2, 2023, and student loan relief is offered through Aug. 31, 2023, that borrower can avoid interest charges for those months. Not a long-term solution, but it will help. Currently we are waiting on the details as to when the end of student loan relief due to the COVID-19 pandemic might occur. Everyone, along with the U.S. Department of Education are waiting for a decision on student loan forgiveness from the Supreme Court which will help determine the logistics for borrowers re-entering repayment.
- Changes to Interest Capitalization for federal student loan starts on July 1, 2023. The government is removing capitalization events which are not mandated by law. One major change, when a federal student loan enters repayment (after you’ve separated from your school and exhausted your grace period), interest will no longer be capitalized. This is important because federal student loans charge interest based on simple interest. Simple interest determines your interest charge on your outstanding principal balance, not on any outstanding, uncapitalized interest you have.
- Overpay as much as you can on your student loan. Help pay down any interest you have accumulated (which has added up) so you can start attacking that principal balance. Simple interest will determine your interest rate charges on your principal balance solely, not on any outstanding interest. The faster you can pay down your principal balance, the less interest you will be charged.
- The new income-driven repayment plan. Along with the Biden-Harris announcement of one-time student loan forgiveness, they also announced proposed rules for a new income-drive repayment plan which will base payments on 5% of a borrower’s discretionary income versus 10-20% from existing plans, , and the new plan is supposed to offer an interest subsidy to avoid negative amortization—which occurs when your monthly payments do not cover accruing interest, which would normally increase your outstanding debt overtime. But note, this plan is not finalized and may not be available until July 1, 2024.
Why is the Interest Rate So High?
You may be wondering, if Congress sets the rate, can’t they choose a lower interest rate? The simple answer is no. It would take an act of Congress to establish a rate outside of the current law. Right now, they are setting interest rates as required by the Higher Education Act of 1965, as amended.
According to the law, once the 10-year Treasury note is decided by auction, there is a set calculation that will determine the interest rates for federal student loan for the upcoming academic year. This means, federal student loan interest rates are tied to the current economic climate. While it doesn’t make anyone feel better, because we have seen a trend of rising interest rates for other types of loans, this was expected.
Lock in Interest Rate, Student Loans
Since we know interest rates will jump for federal student loans first disbursed on or after July 1, 2023, you may be wondering if you can lock in at the current rates. Unfortunately, the answer is no. The school is responsible for drawing down the funds for your upcoming school year. If you're attending school in the 2023-2024 award year (your year start on or after July 1, 2023), generally your school will not be able to draw down those federal student loan funds until close to the start of your classes, maybe even a few days after. That means, those starting in the Fall 2023, you will be borrowing loans under the 2023-2024 award year rates.
If you are borrowing private student loans, if you were to apply now before interest rates increase, you could potentially be able to lock in your rate for 30 - 150 days—depending on the lender. Each lender will have their own approval terms, but it may be worth it to ask them their policy and how early you can lock in your interest rate.