Federal student loan interest rates rise to highest in a decade

The cost of borrowing money from the federal government to pay for college is set to jump to the highest level in at least a decade.

The interest rates on new federal student loans will increase by about half a percentage point from their current levels starting July 1 following the Treasury Department’s auction on Wednesday of 10-year notes, the government bond to which the rates are tied. The rates are recalculated each year.

For new undergraduate student loans, the interest rate will increase from 4.99 percent to 5.5 percent. That’s the highest level that most undergraduate borrowers have faced since 2013.

Graduate borrowers taking out direct federal loans will see a rate of 7.05 percent, up from the current 6.54 percent. And the interest rates on federal PLUS loans — both for graduate students or parents paying for their children’s education — will jump to 8.05 percent from the current 7.54 percent.

Those are the highest interest rates for graduate and parent borrowers since 2006 when Congress switched direct federal student loans to have fixed rates.

Key context: The new interest rates will take effect for loans issued for the upcoming 2023-2024 school year, and they are fixed for the lifetime of the loan.

The changes affect only new federal student loans, not existing loans.

Loan relief ongoing: The interest rate on all federally-held student loans has been set to zero since March 2020 under the freeze on student loan payments, which the Biden administration has extended repeatedly.

The Biden administration is planning to resume charging interest and collecting payments this fall after the Supreme Court decides the legality of its debt cancellation program.

Department officials have said that repayment will begin 60 days after either the court rules or June 30, whichever comes first.

The Education Department is currently preparing to reset interest rates to their normal level in September, according to directives sent to its student loan servicers.