Key Takeaways
As families prepare for a new semester, many are considering how to pay for college. Nearly half of families will borrow money to cover their family’s tuition costs, with the majority of those borrowing through federal student loans. While interest rates on federal student loans are at a 16-year high, they are still much lower than the cost of borrowing on private loans.
As families prepare for their children to return to college, many are considering how to pay for tuition.
According to a new survey from student loan lender College Ave, the majority of families report they plan to pay their tuition fees in one lump sum. However, 45% will borrow to pay for tuition. Of those who will borrow, the majority say they will be taking out federal student loans.
With high interest rates unlikely to ease before the start of the semester, borrowers will be forced to make decisions about how much to borrow and which loans are right for them.
Highest student loan interest rates since 2008
Federal student loan borrowers will face the highest interest rates in 16 years. The fixed interest rate on loans issued by the Department of Education this year will be 6.53% for students and 9.08% for parents.
A rise in the yield on the 10-year Treasury note has pushed Treasury rates higher as investors remain concerned about whether the Federal Reserve will cut interest rates.
Federal loans are cheaper than alternatives
However, these rates are still much lower than the interest rates on private student loans.
According to Investopedia research, the average variable interest rate on private student loans is 10.43%, and for fixed loans it's even higher at 11.11%.
Some families who need to borrow more than the federal loan limits, who need extra money for non-tuition expenses, or who don't meet government income standards turn to private student loans.