Federal student loan interest rates set to be highest in more than a decade

By Jillian Berman

Undergraduates are looking at rates of 6.5% for the life of the loans

Students heading to college this year could wind up paying more for their schooling than those in the recent past. That's because federal student loan interest rates are set to be the highest they've been in more than a decade.

Each year federal student loan rates are determined by the outcome of the May 10-Treasury auction, which happened Wednesday. Though the U.S. Department of Education hasn't officially announced the rates, experts can estimate them based on the formula used by the government. The rates are fixed for the lifetime of the loan. They can't be refinanced in the federal program.

For the 2024-2025 school year, loans for undergraduates will have a rate of 6.5%, according to Mark Kantrowitz, an expert on student financial aid. Rates for graduate Stafford loans, which have an annual limit, will be 8%. PLUS loans, which are available to graduate students and parents, will have a rate of 9%. Parents and graduate students can borrow up to the cost of attendance through the PLUS program.

The higher rates come as expectations that the Federal Reserve would lower its benchmark rate early in 2023 were dashed by higher inflation readings. The 10-year Treasury BX:TMUBMUSD10Y auction is impacted by expectations of the Fed's interest rate policy. Inflation was so ugly in the first quarter that a few Fed officials said that the next move by the central bank could be a rate hike - though Fed Chairman Jerome Powell recently said such a move is "unlikely."

"They're higher than they've been in a long time," Jason Delisle, a nonresident fellow at the Urban Institute said of student loan interest rates. "The rates were low when interest rates in the economy were really low. In some ways the rates have returned to what they used to be prior to the ultra-low interest rate environment we had after the Great Recession."

Student-loan interest rate policy has changed over time

Federal student loans have always had an interest rate, but the way that rate is determined has varied over time. For decades, Congress would tweak the rates based on certain policy priorities. They might use the funds generated through student loan interest to pay for Pell grants, the money the government provides to low-income students to attend college. In other cases, they might use the money to subsidize the lenders and other organizations that were involved in the student loan program until 2010.

Lawmakers put the current formula in place in 2013 as part of a bipartisan bill to prevent interest rates from doubling. Because the student loan rates are tied to broader interest rate policy, for years following that law the rates were relatively low - in some years, less than 4% for undergraduates.

Still, some borrowers and policymakers have questioned for years why the government charges interest in a program that's supposed to subsidize students going to college. One lawmaker has proposed getting rid of interest rates on the loans.

Interest rates have been a key source of stress for borrowers. Many borrowers have watched their balances balloon even as they've made payments on the loans for years. President Joe Biden's latest mass student loan forgiveness plan would allow borrowers to have at least $20,000 in unpaid interest canceled.

In comments submitted by the public on that plan, borrowers highlighted the challenges student loan interest has posed to them making progress on the debt.

"Is there any hope to lower interest rates to a more manageable rate? It's hard to see any progress when all my payments cover the interest every month?" one wrote.

"I have no problem paying back my loans I obtained for my education," another wrote, "My concern is the interest that I am paying...I have been making payments every month but the balance NEVER goes down. I have since realized that is because I am only paying interest."

The Biden administration's new student-loan repayment program, called SAVE, could make the interest rate less relevant for some borrowers. Under that plan, borrowers repay their debt as a percentage of their income and can have the remainder cancelled after a certain number of years of payments.

If borrowers' income-tied payments are so low that they don't cover the interest, the government covers the unpaid interest. That means the borrower's balance doesn't grow - a feature of previous plans that caused a lot of anxiety for borrowers.

Attorneys general in Republican-led states are suing to stop SAVE.

-Jillian Berman

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-09-24 1222ET

Copyright (c) 2024 Dow Jones & Company, Inc.