Student Loans Are About to Get A Lot More Expensive — Here’s Why

Student loan interest rates are about to hike in a major way. But will it affect you?

a guy sits, stressed out at his kitchen table looking over finances
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Hold on to your hats, folks, student loans are about to get a lot more expensive. The Federal Reserve announced raised interest rates starting July 1, 2022, on consumer loans to combat inflation, including federal subsidized and unsubsidized student loans.

How Much Will Interest Rates Hike?

And it’s not just a little rate hike, it’s a doozy — 1.26 percentage points, which may not sound like much, but translates to about a 34% increase in undergrad loans, a 24% increase in graduate-level loans, and a 20% increase in PLUS loans.

Interest rates for undergrad loans will increase from 3.73% to 4.99%, for graduate loans, the jump will be 5.28% to 6.54%, and PLUS loans will go from 6.28% to 7.54%.

Will You Be Affected If All Of Your Student Loans Are Already Taken Out?

With federal student loan repayment set to resume at the end of the summer, this increase may feel like the end of your bank account, but don’t worry, the rate hike, which will begin July 1st, does not affect any federal loans that you’ve already taken out. Federal student loans have a fixed interest rate that will not increase despite the Fed’s rate hike, so if you have existing loans, they will not be impacted by this whopper of a rate increase.

The rate hike will be in effect for parents and students who plan to take out federal student loans for the upcoming fall semester. If you plan to take out privately-funded student loans, you might be safe from the rate hike. The government sets rates for federal student loans, while private loans are managed by the entity providing the loan, so they’ll be the ones to set those rates. Contact your lender to determine if new student loans will be affected by the rate increase.

Unfortunately for new borrowers, though, since federally-funded student loans have fixed interest rates, any loans taken out between July 1, 2022, and June 30, 2023, will maintain the same rate for the life of the loan, even if interest rates drop again before you’ve paid your loan off. If you’re interested in lowering your rate, you can always consider refinancing your federal student loan through a private lender and negotiating a lower rate. According to Forbes, to refinance a student loan, “you’ll need a credit score of at least 650, be employed or have a job offer, have stable monthly income, and have the monthly cash flow to pay your student loans and other living expenses.”

Could The Interest Rates Get Much Higher?

It bears noting, however, that Congress set a cap on interest rates for federal student loans, according to The Washington Post — rates for undergrad loans can never go beyond 8.25%, graduate-level loans can’t surpass 9.5%, and interest rates for PLUS loans top out at 10.5%.

However, those figures may seem like a poor consolation to the legions of families who are preparing to take on student loans at the new, higher rates. Considering the crushing weight of student loan debt being shouldered by 45 million Americans already and the national conversation over federal student loan debt forgiveness, adding additional interest, and increasing that burden for kids just entering college, may be shortsighted.