Some federal student loan interest rates at record highs

(NerdWallet) - Federal student loan interest rates for 2024-25 are now live. Some have reached record highs, increasing the cost of college for people who will take out student loans for the upcoming school year.

Here’s how the current 2024-25 federal student loan interest rates compare to 2023-24 rates:

Direct subsidized and unsubsidized loans for undergraduate students: 6.53% interest rate for 2024-25, up from 5.50%.  Direct unsubsidized loans for graduate students: 8.08% interest rate for 2024-25, up from 7.05% PLUS loans, available to parents and grad students to fill in funding gaps: 9.08% interest rate for 2024-25, up from 8.05%. 

Since 2006, all federal student loans have had fixed interest rates. Undergraduate direct loan interest rates haven’t been this high in 16 years, since the 2008-09 academic year. (The standing record is 6.8%, for loans disbursed between 2006 and 2008.) Interest rates on direct graduate loans and PLUS loans have never been this high.

The latest federal interest rate hikes come on the heels of major FAFSA errors, which impacted and delayed financial aid offers, including federal loan eligibility, for millions of students. For some families, private student loans with lower interest rates may look more attractive this year — but private loans come with fewer borrower protections and no forgiveness options.

Rising rates increase the total cost of college

Each spring, the government sets federal student loan interest rates for the academic year ahead. The rates are effective from July 1, 2024 to June 30, 2025, and they apply to all borrowers who take out new federal student loans for the 2024-25 school year. Federal student loans have fixed interest rates, so they won’t change during the repayment period — which typically lasts from 10 to 25 years, depending on your repayment plan. (If you’re already repaying older student loans, this interest rate hike doesn’t affect you.)

Ultimately, higher interest rates will make college more expensive for the millions of college students and their families who take out loans. Today, 42.8 million people collectively owe $1.62 trillion in outstanding federal student loans, per Department of Education data.

That tally may grow in the coming years: A 2024 high school graduate heading to college this fall could amass about $37,000 in student loan debt while pursuing their bachelor’s degree, according to a recent NerdWallet analysis. Dependent undergraduate students can take out no more than $31,000 in federal loans, so more students may turn to private loans to fill the gaps.

Here’s an example of how the higher interest rates can hit your wallet: If you start college in the fall and borrow $31,000 worth of unsubsidized federal direct loans over the course of your undergraduate education, with a 6.53% interest rate, you’ll wind up paying back about $42,315 under a standard 10-year repayment plan. If you’d started college in 2020-21 and taken out the same $31,000 in unsubsidized federal loans with a record-low 2.75% interest rate, you’d have had to repay around $35,510 over 10 years — a $6,805 difference.

In practice, you could pay even more. You can’t borrow the full $31,000 at once — the capped amount is split up over the years you’re in school. If you'll be a college freshman in the fall, interest rates could increase in the three (or more) years to follow.

Run the numbers with a student loan calculator to see how much your debt may cost over time.

Federal vs. private student loan interest rates

In recent years, federal student loans have offered lower interest rates than private alternatives — but that may no longer be true for some borrowers. Currently, private student loans for undergraduates have interest rates from 3.85% to 15.9%, according to a May 2024 NerdWallet analysis.

“More than ever, we are really encouraging our families to be good consumers,” says Stacey MacPhetres, senior director of education finance at EdAssist by Bright Horizons.

Shop around for private student loans and compare interest rates like you would for a mortgage, MacPhetres adds.

To qualify for the lowest rates on private student loans, borrowers must have a high credit score. Many students will need a parent or co-signer with excellent credit to co-sign the loan and accept equal legal responsibility for repaying it.

Federal student loans don’t allow co-signers, and only federal PLUS loans require a credit check. Other federal student loan borrower protections not typically offered by private lenders include:

Repayment plans that cap monthly bills at a certain percentage of your income, such as the new SAVE repayment plan.  Extended payment pauses, like a student loan deferment or forbearance, for financial hardships. (Private loan forbearances are generally shorter and more difficult to qualify for.)  Loan forgiveness programs, like Public Service Loan Forgiveness (PSLF).  Loan discharges for borrowers whose school closed or defrauded them. 

As a general guideline, borrowers should prioritize federal student loans. If they still have remaining costs, private student loans are a good option to fill in the gaps.

But when it comes to PLUS loans, private alternatives may be a better choice this year if you can qualify for a lower interest rate. PLUS loans don’t offer the same robust protections and flexible repayment options as other types of federal student loans, and they have a 4.228% origination fee that most private lenders don’t require.

Submit the FAFSA and free up cash flow to minimize borrowing

Evaluate your family’s capacity to pay out of pocket or consider using some savings or investments to cover education bills this year, MacPhetres says. “We’re really trying to encourage everybody to exhaust all of their other options before borrowing at all, which includes federal student loans.”

You can also minimize your total college debt and interest payments by leaning on funding sources you won’t have to repay, like scholarships, grants and work-study. You must submit the FAFSA for each year you’ll be in school to qualify for most grants and work-study. That includes the federal need-based Pell Grant, which can give you up to $7,395 per year in free money to pay for college. Many scholarships require applicants to submit the FAFSA. You also need to submit the form to be eligible for federal student loans.

The Free Application for Federal Student Aid is open until June 30, 2025, for the 2024-25 school year, but you should fill it out as soon as possible to increase your chances of getting more money — some types of aid draw from limited pools and can run out.

Another strategy to reduce borrowing: See where you or your child can trim college costs in the first place.

“Your student doesn't have to live in the best residence facility right now ... or maybe they don't need the 21-meal plan if they have never eaten breakfast in their lives,” MacPhetres says. “Little things that you might not think would have a significant impact can certainly help in trying to reduce your overall spending.”

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