Interest on Federal Student Loans Is Rising to 6.53%

This has already been a challenging year for college applicants, starting with the problems with a crucial federal form that delayed financial aid offers. Now, students and families have more to worry about: The cost of borrowing for college for the next school year is rising to the highest rate in more than a decade.

The interest rate on new federal student loans for undergraduates will be 6.53 percent as of July 1, up from 5.5 percent this year, the Education Department announced last week.

Rates on loans for graduate and professional students will rise to 8.08 percent. And rates on PLUS loans — extra financing available to parents of undergraduate students as well as to graduate students — will increase to 9.08 percent.

Rates on federal student loans are based on a formula, set by Congress, that takes the high yield on the 10-year Treasury note from an auction in May, plus a fixed, added rate, depending on the type of loan. The yield at the May 8 auction was 4.483 percent, plus an added 2.05 percent for undergraduate loans. (The yield last year in the Treasury auction was 3.448. Add-on rates are higher for graduate and PLUS loans.)

Interest rates generally have remained high as the Federal Reserve has battled inflation. Still, the new student loan rates seem especially steep compared with just a few years ago, said Mark Kantrowitz, a financial-aid expert. In the 2020-21 academic year, the rate on undergraduate loans was 2.75 percent. Still, rates were as high as 14 percent in the early 1980s, Mr. Kantrowitz said.

The new rates apply to loans borrowed from July 1 through June 2025 and remain fixed for the life of the loan. They don’t apply to loans that students have already taken out.

The increase translates into roughly an extra $5 in the monthly payment on $10,000 in debt over a 10-year repayment term, Mr. Kantrowitz calculated.

The rates are increasing amid rising concern about student debt and the high cost of college. As of early 2024, almost 43 million borrowers held an average of about $37,850 in federal student debt, according to Federal Student Aid, an office of the Education Department.

In a survey published Thursday by the nonpartisan Pew Research Center, nearly half of American adults (47 percent) said a college degree was worth the cost but only if someone didn’t have to take out loans to attend. Fewer than a quarter (22 percent) said it was worth the cost even if someone had to borrow.

Pew also analyzed federal data and found that households headed by a young high school graduate had a typical net worth of $30,700 in 2022, compared with $120,200 for those headed by a young college graduate.

Michele Shepard Zampini, senior director of college affordability at the nonprofit Institute for College Access and Success, said students should keep the new federal loan rates — and borrowing for college — in perspective.

“The rates are higher than we’d like, but it’s not a deal breaker,” she said. “I’d never want to see someone not go to college just because it meant taking on federal student loans,” she added.

The institute advises borrowers to “borrow what you need” to cover costs and to participate fully in college, Ms. Zampini said. In general, you can borrow up to $31,000 in federal loans as an undergraduate student who is dependent on your family for support. (The amount you can borrow is capped each year, and limits are higher for independent students.)

Some students may try to borrow much less, thinking they can work more to cover costs. But that often “works to the detriment of the student,” Ms. Zampini said, because students may have to work so much they fall behind in their classes. “It’s definitely a balance.”

Students should compare the costs of different colleges and consider choosing less expensive alternatives — perhaps a state school rather than a private one — to manage their costs, Ms. Zampini said. Check a school’s graduation rates and career outlook. If students generally take longer than four years to graduate, the degree will cost more money. (One place to look this up is the Education Department’s online College Scorecard.)

The new, more generous federal student loan repayment plan, known as SAVE, offers a “safety valve” if you worry about affording your loan payments, Ms. Zampini said. With SAVE, which stands for Saving on a Valuable Education, payments are based on earnings and household size. After you make monthly payments for a certain number of years — as few as 10, depending on the amount borrowed — any remaining balance is forgiven.

For some low-income workers, payments under SAVE can be reduced to zero. And if a borrower’s monthly payment doesn’t cover the interest owed, the Education Department will cancel the uncovered portion of the interest. The loan balance doesn’t grow because of unpaid interest.

Saving in a 529 plan can help reduce the amount borrowed. A 529 plan is a tax-favored savings account intended to help cover the cost of college. Contributions to the accounts, named for part of the tax code, grow tax free and can be withdrawn tax free to pay for costs like tuition, housing, meals and books. (There’s no federal tax deduction for 529 contributions, but many states offer tax breaks.)

“529s are a good tool in the toolbox,” said Tony Kure, managing director for the northeastern Ohio market at the wealth management firm Johnson Investment Counsel.

Mr. Kure recommends opening a 529 when a child is born to give as much time as possible for the funds to grow before college. If you have more than one child, he advises opening a separate account for each.

Many 529 plans offer promotions or incentives to save during May, so now is a good time to research accounts if you’ve been considering opening one.

Here are some questions and answers about student loans:

How much should I borrow for college?

Aim for total student debt that is less than your expected annual starting salary, Mr. Kantrowitz said. If your debt is less than your income, he said, you should be able to repay your student loans in 10 years or less. To get an idea of what you might earn, check out the Labor Department’s data on pay by occupation. Another place to look is a report on pay based on college majors published last year by HEA Group, a research and consulting firm.

Can I get better rates on private student loans?

Rates on some private student loans — those offered by banks rather than the federal government — may be competitive with the new federal rates for borrowers with stellar credit (scores of 780 or higher), Mr. Kantrowitz said. But private loans can be riskier because they lack the protections offered by federal loans, like the ability to seek a pause in payments during a financial setback, payment plans tied to your income and options to have some of the debt forgiven.

Can I deduct student loan interest on my federal tax return?

You can generally deduct up to $2,500 in interest paid on federal and private student loans, even if you don’t itemize on your return, Mr. Kantrowitz said.