Signs that inflation is easing have revived hopes that the Federal Reserve will cut interest rates as soon as this summer. But even if that happens, it will come too late for thousands of college students and their families.
The interest rate on federal undergraduate student loans payable between July 1, 2024 and June 30, 2025 will be 6.53%, the highest in 16 years. The interest rate on federal Parent PLUS loans, which parents can borrow to help cover the costs of their children's college education, will jump to 9.08%, the highest in 33 years.
Federal student loan interest rates are adjusted annually based on the high yield of the last 10-year Treasury bond auction in May. The interest rate remains fixed for the life of the loan, even if overall interest rates fall. However, because the interest rate is fixed, any outstanding federal student loans are not affected. For example, if you borrowed a federal student loan between July 1, 2023 and June 30, 2024, your interest rate will remain at 5.5%.
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Private Student Loans
As college costs continue to rise, rising interest rates will make it even harder for families to afford college. Loans from private lenders may offer more competitive interest rates, but they're only available to students who have a cosigner with good credit, says Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.” Additionally, the cosigner parent is held liable if the primary borrower defaults, and the parent's credit history could be negatively affected if the borrower misses or is late with payments.
Additionally, Kantrowitz said, private student loans typically lack many important features of federal student loans, such as deferment, income-driven repayment and loan forgiveness.
Limiting debt
A better strategy for both students and their parents is to keep debt as low as possible. Students who stay within their federal student loan limits are less likely to overborrow, Kantrowitz said. In 2024, the maximum amount a dependent undergraduate student can borrow in subsidized and unsubsidized federal student loans is $5,500 in the first year, $6,500 in the second year, and $7,500 in the third year and beyond, for a total borrowing limit of $31,000.
If that's not enough to cover college costs, parents can take out PLUS loans up to the total cost of their child's attendance, but that's not always a good idea, especially at current interest rates. Kantrowitz recommends limiting the total amount of borrowing for a child's college education to the amount of parents' annual salary. If you plan to retire within 10 years, you should reduce the amount you borrow proportionately; if you plan to retire within five years, for example, it should be half your annual salary, he says.
Note: This item first appeared in Kiplinger Personal Finance Magazine, your trusted source of monthly advice and guidance. Subscribe here to help you multiply the money you make and keep more money in your pocket.
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