If you’re taking out federal student loans to pay for school next year, they’re about to get more expensive.
The interest rate on direct undergraduate federal student loans — which are determined by Congress each year — will increase to 5.5% from 4.99% for loans disbursed on or after July 1, 2023, an Education Department spokesperson confirmed. The rate will only apply to new loans and is fixed for the life of the loan.
The 5.5% interest rate applies to both direct subsidized and unsubsidized undergraduate loans. Interest rates for undergraduate borrowers haven’t hit 5% since 2019. Existing federal loans have not been accruing interest since the pandemic pause on payments and interest went into effect in 2020. It’s set to end this summer.
Before that, unsubsidized loan rates hadn’t been higher than 5% since 2013, the last year they had a separate rate from subsidized loans.
Graduate student borrowers will see the rates on their loans increase as well, to 7.05% from last year’s 6.54%. The rates on Plus loans — which can be taken out by parents on behalf of their children, or by graduate and professional students — will also go up to 8.05% from 7.54%.
While it’s generally good advice to compare rates from a variety of lenders before you take out a loan, student loans are a bit different. It’s possible you could find a better interest rate with a private lender, but federal student loans come with benefits that could wind up being more valuable than a lower rate.
If you’re eligible to take out federal student loans and can avoid taking on more debt to pay for school, here are a few reasons it’s generally a good idea to stick with Uncle Sam.
1. Loan forgiveness
Depending on how the Supreme Court rules this summer, all federal student loan borrowers making less than $125,000 a year may see some or all of their debt forgiven — one benefit private borrowers definitely won’t receive.
Aside from President Joe Biden’s debt relief plan, federal loans are eligible to be forgiven through other programs, including Public Service Loan Forgiveness and income-driven repayment plans (IDR). You’ll need to work in public service for 10 years or make payments on an IDR for 20 or 25 years in order to see any of your balance discharged, but it’s more relief than most private borrowers will ever see.
Some private lenders forgive the balances of borrowers who pass away or become totally disabled, but there’s no guarantee. Your federal loans will be discharged if you pass away and you may be eligible to have your loans eliminated if you have a disability that prevents you from working.
2. Better interest terms
While interest rates on federal student loans remain the same over the life of the loan, private student loans often come with variable interest rates, which can rise over time. That can make it difficult to plan out your repayment and cost you more money down the line.
With federal loans, not only do you keep the same interest rate, but you won’t have to pay interest on subsidized loans while you’re in school.
Subsidized loans are intended for borrowers who demonstrate financial need. The government covers the interest fees on these loans if you’re in school at least part-time, for the first six months after you leave school and during periods of deferment, like if you choose to go back to school or need to pause payments due to financial circumstances.
3. Flexible repayment options
While student debt in any form can be burdensome for borrowers, federal student loans come with a variety of repayment options aimed helping you stay on top of your payments.
You can choose from a standard repayment plan to see your federal debt paid off in 10 years or explore IDRs, where monthly payments are set at a percentage of your disposable income.
It might take longer to pay off your loans with an IDR plan — and thus cost more in interest — but they’re designed to help you keep up with monthly payments and avoid turmoil caused by missing payments or defaulting on your loans.
A private lender might work with you to help you manage your debt if you’re struggling to make payments, but there’s no guarantee. Even if your lender allows you to pause payments for a period, your debt will likely keep accruing interest.
Paying for college is not an easy feat for many families. You have to do what’s best for your situation and the first step is educating yourself on the different options available. Don’t forget to apply for scholarships and financial aid to help cover costs as well.
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