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Federal Student Loan Rates Rise to Highest Level in Over 15 Years

The overall cost of student loans in the United States has been a topic of concern for many years. Now high interest rates are just adding to the price tag of the loans and the overall cost of college. The recent announcement of the interest rate increase of federal undergraduate student loans from 5.5% to 6.53% for the 2024-2025 academic year adds another layer of anxiety for students and their families. Parent plus loans which are often used by families to supplement the low cap of $5500 for student loans now have an interest rate of 9.08%. This blog explores the implications of this interest rate hike, the factors driving it, and potential measures to alleviate its impact.

Implications of the Interest Rate Increase

The increase in student loan interest rates to 6.53% significantly impacts future students. Higher interest rates mean that borrowers will have to pay more over the life of their loans, potentially extending the time it takes to pay off their debt. For example, a student borrowing $30,000 with a 10-year repayment plan would see their payment increase from $326 per month to $341. Over the life of the loans, this student will pay an extra $1800. The problem is even worse for Parent Plus borrowers. It is not uncommon to see parents borrow $100,000 for just one child. At 9.08% with a standard 10-year repayment plan, parents will have a monthly bill of $1272.

(Be advised that the rate increase will only affect students who have yet to apply for loans. Borrowers already in repayment status shouldn’t see any changes in their monthly payments.)1

The debt many students and families take on is a heavy financial burden and the high interest rates just increases this problem. It makes higher education less accessible, particularly for those from lower-income backgrounds. The fear of accumulating substantial debt might deter many prospective students from pursuing higher education altogether, which could have long-term ramifications for the nation’s workforce and possible economic growth.

Less selective colleges may notice a serious decline in enrollment over the next few years due to less students applying. This is a trend which has already started and some smaller institutions are suffering.

Factors Driving the Increase

Several factors have contributed to the rising cost of student loans. One primary factor is the economic environment, particularly inflation and federal monetary policy. As inflation rates rise, the Federal Reserve increases interest rates to curb spending and control price stability. These rate hikes indirectly affect the interest rates on federal student loans.

Meanwhile the increase in the price of college has continued to go up faster than the rate of inflation. While the availability of aid has increased, it cannot meet demand. There have been a lot of headlines about student loan forgiveness and improved repayment plans for student loans, but these are the Federal Direct loans for undergraduates and graduates. The $5500 cap for the Federal Direct undergraduate loan has not increased in years. This pushes families to borrow with other programs that have higher rates and no loan forgiveness.

Students should consider applying for any available scholarships or grants. There are many kinds of scholarships available through state and local governments, as well as private and nonprofit organizations. These may be based on merit, financial situations, sports, extras curricular activities, etc. Oftentimes, these scholarships and grants go unawarded because students don’t know to apply for them.

Moreover, increased financial literacy education can empower students to make informed borrowing decisions. By understanding the long-term implications of student loans, students and their families can plan better, seek scholarships, and explore alternative funding sources before resorting to loans.

Above all, students and families need to choose colleges within their price range and avoid large amounts of debt in the first place. While this is difficult, it’s possible. Many public colleges and universities are comparable bargains. Less selective schools often provide significant merit scholarships.

For parents with younger children, you should be thinking about the cost of college from the day your child is born. Start a 529 plan for each child and save money into it each year. Invite grandparents, aunts, and uncles to contribute as well. When it comes time for college, the dedicated funds in that 529 plan will open the horizons for your child.

Conclusion

The increase in student loan interest rates to 6.53% for the 2024-2025 academic year will present significant challenges for many students and their families. The higher cost of borrowing combined with the significant increase in the costs of attendance may deter students from pursuing higher education.

At Cereus Financial our comprehensive College Money Match program can help families

with a sophomore or junior in high school who want to maximize needs-based and merit-based financial aid by choosing the right college and creating an affordable plan to pay for it.

Reach out to us early in your HS student’s journey to apply for college so that we can help you and your family with college considerations.

1 https://www.forbes.com/advisor/student-loans/new-federal-student-loan-rates/

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