If you took out federal student loans during the pandemic, you may have secured the lowest interest rates ever issued on federal loans. Some loans had rates as low as 2.75%.
But inflation is soaring, and the Fed raised its benchmark rate to try and curb it. As a result, interest rates for all forms of credit — not just student loans — are rising. Following that trend, the government has raised the interest rates on all federal student loans. And in many cases, the increases in student loan interest rates are significant.
Changes to Federal Student Loan Interest Rates
The interest rate changes affect loans disbursed on or after July 1, 2022, through June 30, 2023. All federal student loan rates increased, including loans for graduate students and parents.
Below are the current interest rates and the rates for the previous two years:
| Rates for Loans Disbursed 7/1/2022 – 6/30/2023 | Rates for Loans Disbursed 7/1/2021 – 6/30/2022 | Rates for Loans Disbursed 7/1/2020 – 6/30/2021 | |
| Direct Subsidized | 4.99% | 3.73% | 2.75% |
| Direct Unsubsidized (Undergrad) | 4.99% | 3.73% | 2.75% |
| Direct Unsubsidized (Grad) | 6.54% | 5.28% | 4.30% |
| PLUS | 7.54% | 6.28% | 5.30% |
As you can see, the changes were substantial; for undergraduate students, rates increased by approximately 33% compared to last year; they increased by about 81% compared to loans issued in 2020 through early 2021.
The new rates only apply to new student loans; if you have existing federal student loans with lower rates, those loans aren’t impacted; your interest rate is fixed and will stay the same for the duration of your repayment.
How the Student Loan Interest Increase Impacts Repayment
While interest rate increases are widely recognized as a negative for borrowers, many people don’t realize how much of an impact those increases can have on individuals. But with such steep rate increases, those rate hikes can significantly affect your total loan repayment cost.
For example, let’s say you need to borrow $5,000 for your undergraduate education. If you took out the loan in 2020, your rate would be 2.75%. Over the course of your repayment, you’d pay a total of $5,725 — you’d pay just $725 in interest charges.
But let’s say you took out $5,000 at the new, higher rates. At 4.99% interest, you’d repay $1,361 in interest charges — nearly double what you’d pay with a 2.75% rate. In total, your loan cost would be $6,361.
Below is an example of how the interest rate would affect the total repayment cost on a $5,000 loan with a 10-year Standard Repayment Plan.
| 4.99% Interest | 3.73% Interest | 2.75% Interest | |
| Loan Term | 10 Years | 10 Years | 10 Years |
| Monthly Payment | $53 | $50 | $48 |
| Total Interest | $1,361 | $998 | $725 |
| Total Paid | $6,361 | $5,998 | $5,725 |
3 Ways the Student Loan Interest Hike May Affect You
A higher interest rate may have a substantial impact on you as a student loan borrower. Here are three ways the interest rate hike can affect you that you may not have thought about:
1. You May Have a Higher Monthly Payment
Your minimum monthly payments are determined by your loan balance and your interest rate. With a higher rate, your monthly payments will also be higher. Interest rate hikes can make it more difficult to afford your payments.
2. Your Overall Repayment Cost May Be Higher
High interest rates increase your overall repayment cost. More interest builds, so your balance can grow when you’re not making payments.
3. More Interest Will Accrue During Deferments
If you need to defer your payments, such as returning to school, interest continues to accrue on all federal loans except Direct Subsidized loans. With all other loan types, interest will build. With a higher interest rate, more interest can accrue, causing you to owe even more.
How Student Loan Interest Rates Are Set
How student loan interest rates are determined is dependent on the loan type. The two main types are federal and private.
Federal Student Loans
Federal student loan interest rates are set by federal law. They are adjusted yearly and can rise or fall depending on market conditions, including the Fed’s benchmark rate.
The interest rate is fixed, so it stays the same for the entirety of your repayment term. If you are following a Standard Repayment Plan — the default option — your monthly payments are the same for the duration of the loan.
Rate changes only affect new loans, so you may have multiple federal loans with differing interest rates by the time you graduate.
Private Student Loans
With the latest federal student loan interest rate increase, private student loans can be appealing. They can fill the gap when you exhaust other financial aid options and may offer lower rates.
Private student loans can have fixed or variable interest rates. While fixed rates stay the same for the entire repayment period, variable rates start low. Over time, they can change along with market conditions.
Interest rates vary by lender, but rates are usually based on the LIBOR plus a margin rate. Your rate is determined by several factors, including your creditworthiness, income, and the selected loan term.
When shopping for a private student loan, keep in mind that private loans don’t have the same protections or benefits that federal loans offer. For example, private student loans aren’t eligible for income-driven repayment plans, Public Service Loan Forgiveness, or federal forbearance or deferment programs. When borrowing money with private loans, only take out the minimum you need and make sure you can comfortably afford the payments.
ELFI offers private student loans for undergraduates, graduate students, and parent borrowers. Using the Find My Rate tool, you can view rates and loan options without affecting your credit score.
