How will the new federal student loan interest rates affect you? Learn about the latest changes for 2024-25, why they are rising, and how to manage your loan repayment.
Every May, interest rates on federal student loans are recalibrated for the upcoming school year. For the 2024-25 academic year, these rates are set to increase by more than 1%, marking the fourth consecutive year of rising rates. This article will delve into the new federal student loan rates, the factors driving these increases, and their implications for students and parents.
FAQS
Q1: When do the new federal student loan interest rates take effect?
A1: The new rates apply to federal student loans issued between July 1, 2024, and June 30, 2025.
Q2: How are federal student loan interest rates determined?
A2: Federal student loan interest rates are calculated based on the yield of the 10-year U.S. Treasury note plus a fixed amount set by Congress.
Q3: What are the new federal student loans rates for undergraduate Direct Loans?
A3: The interest rate for undergraduate Direct Loans is 6.53% for the 2024-25 school year, up from 5.5% for 2023-24.
Q3: Are there any borrowing limits for federal student loans?
A3: Yes, borrowing limits vary by loan type and student status. For example, dependent undergraduates have a maximum borrowing limit of $31,000, with specific annual limits.
Q4: What factors are driving the increase in federal student loan interest rates?
A4: Ongoing inflationary pressures and the federal funds rate set by the Federal Reserve are key factors influencing the federal student loan rate increase.
Increases In Federal Student Loan Interest Rates For 2024-25 School Year
Every May, interest rates on federal student loans are reset for the upcoming school year.
The rates are calculated by combining the yield on the 10-year U.S. Treasury note with an extra fixed amount set by Congress.
Based on this calculation, interest rates on federal student loans are set to increase for the 2024-25 school year by more than 1%, the fourth straight year of increases.
The new rate for undergraduate Direct Loans is the highest in over a decade, while the new rates for graduate Direct Loans and graduate and parent PLUS Loans are at the highest level in more than 20 years.
The rates apply to new federal student loans issued July 1, 2024, through June 30, 2025, and the interest rate is fixed for the life of the loan.
Ongoing inflationary pressures have played a part in the higher rates, similar to last year. The federal funds rate set by the Federal Open Market Committee of the Federal Reserve directly influences the yield on the 10-year Treasury note, which in turn influences the interest rate on federal student loans.
Implications Of Increase In Federal Student Loan Interest Rates For Borrowers
The rise in interest rates means that students and parents will face higher borrowing costs for the 2024-25 school year.
This increase can significantly impact the total repayment amount over the life of the loan.
Borrowers should carefully consider these new rates when planning their education financing and explore options for scholarships, grants, and other forms of financial aid to minimize loan dependency.
How Interest Adds Up On Federal Student Loans
It’s the borrowers responsibility to pay any interest that accrues (adds up) on federal student loans. And, in some cases, unpaid interest can capitalize (be added to the principal balance).
On a traditional repayment plan (Standard, Graduated, or Extended), the monthly loan payment covers all the interest that accrues between monthly payments; so no additional unpaid interest will accrue while making payments on one of these plans.
But unpaid interest can add up in some situations, such as an income-driven repayment (IDR) plan or if payments are not being made.
Fees For Federal Student Loans
Most federal student loans have loan fees. These fees are a percentage of the total loan amount.
A loan fee comes out of the amount of money that is disbursed (paid out) while in school.
This means the money the borrower receives will be less than the amount actually borrowed.
The borrower is responsible for repaying the entire amount borrowed and not just the amount received.
The 2024-25 academic year will see federal student loan interest rates reach their highest levels in over a decade. Understanding these changes and their implications is crucial for students and parents as they navigate their education financing options. By staying informed and exploring alternative funding sources, borrowers can better manage their financial responsibilities.
Summary of Changes
2024-25 | 2023-24 | AVAILABLE TO | BORROWING LIMITS | |
Direct Loans: Undergraduate Students (Subsidized and Unsubsidized) | 6.53% | 5.50% | Undergraduate students only. Subsidized loans require financial need as determined by the FAFSA (Free Application for Federal Student Aid). Unsubsidized loans are available to any student, regardless of financial need. | For dependent undergraduates: 1st year: $5,500 (max $3,500 subsidized) 2nd year: $6,500 (max $4,500 subsidized) 3rd, 4th, 5th year: $7,500 (max $5,500 subsidized) Max: $31,000 (max $23,000 subsidized) |
Direct Loans: Graduate Students (Unsubsidized only) | 8.08% | 7.05% | Graduate and professional students. All students are eligible regardless of financial need. | $20,500 per year; max $138,500 |
PLUS Loans: Parents and Graduate Students (Unsubsidized only) | 9.08% | 8.05% | Parents of dependent undergraduate students and graduate and professional students. | Total cost of education, minus any other aid received by student or parent. |
Contact your tax and financial advisors to determine the best moves for your situation.