New student loan borrowers are about to face the highest interest rates since the Great Recession

May 23, 2023, 5:36 PM UTC
This year’s new, higher rates are, in part, another result of the Federal Reserve’s interest rate hikes.
Boston Globe—Getty Images

How will the resumption of federal student loan payments affect your budget? Email senior writer Alicia Adamczyk for a future article.

As borrowers await the fate of President Joe Biden’s widespread student loan forgiveness plan, interest rates on new federal undergraduate student loans will increase by a half percentage point for the upcoming school year to 5.5%, according to the U.S. Department of Education. That would be the highest interest rate on new federal loans since the 2009–10 school year, in the depths of the Great Recession.

Interest rates for the coming school year are based on the 10-year Treasury bond auction held in May. This year’s new, higher rates are, in part, another result of the Federal Reserve’s interest rate hikes over the past year-plus to combat inflation. Three years ago, federal undergraduate loans had an interest rate of 2.75%—meaning they will increase by close to 14% since then for the coming year.

Other federal loans will also increase by a half percentage point: Graduate loans will rise to 7.05% from 6.54%, while Parent PLUS loans will rise to 8.05%.

Student loans that originated before this year are not affected by the new rates, meaning borrowers who already have student debt won’t have to pay this interest rate when they restart their payments; since 2006, interest rates for federal loans have been fixed for the life of the loan (unless the borrower refinances with a private lender). Private loans are also not affected. The new rates will apply to loans taken out from July 1, 2023, through June 2024.

Interest rates on student loans have been rising since the start of the COVID-19 pandemic. Some advocates, including lawmakers from both major parties, have suggested adopting 0% interest rates for education debt to help stem the student debt crisis.

“You wouldn’t have these shocking cases that appear sometimes, ‘Oh, I’ve been paying off loans for 50 years,’” Michael Kitchen, senior managing editor at Student Loan Hero, a loan resource site, previously told Fortune about setting rates at 0%. Borrowers would be able to “pay off their loans in a matter of years rather than decades.”

Higher interest will mean higher payments for the millions of college students (and parents and other family members) who take out loans each academic year; over the life of the loan, that could mean paying thousands of dollars more in interest. Already, around 44 million people owe over $1.6 trillion in federal student loans.

The bump in interest rates could come just as older borrowers are set to resume payments and interest begins to compound on federal loans once again. For over three years, payments and interest accrual have been paused owing to the COVID-19 pandemic. While it is possible that the Biden administration could once again extend the payment pause, experts have said it is not likely (but we’ve been here before).

Some economists have warned of a “student loan cliff” when payments resume: Many cash-strapped households, already struggling as a result of inflation, could suffer even more when the average $396-per-month payment is added back to their financial obligations. Research has found many households with federal student loan balances took on more debt—in the form of mortgages, higher credit card balances, etc.—during the payment pause. And delinquency rates for those other types of consumer debt are already on the rise.

Currently, the payment moratorium is set to end 60 days after the U.S. Supreme Court reaches a decision on Biden’s cancellation plan, or by September, whichever comes first. Biden’s plan would forgive federal student loans for most borrowers, up to $20,000.

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