Student Loan Rates to Reach 16-Year High

As borrowing costs for student loans are already at unseen levels, rates are expected to rise even higher in the coming months to a high not seen in 16 years.

According to ABC News, the current interest rate on a federal undergraduate student loan, which is 5.5%, is expected to rise to 6.5% in July. This would mark the highest level since 2008. The borrowing rate for student loans is determined as a result of adding a fixed amount of 2.05% to the yield on the 10-year Treasury bond, which is set every May at an annual auction. On Wednesday, the 2024 auction saw 10-year Treasury bonds sold at a yield of 4.48%.

Subsequently, the 10-year Treasury bond yield determines the benchmark interest rate that is set by the Federal Reserve. While the rate previously remained low, that rate has skyrocketed since 2022 as part of the Fed’s plans to counter rising inflation. As a result, student loan rates have also risen dramatically.

The new rate increases will apply only to new loans for the 2024-2025 academic year, which start on July 1st, and thus will not affect pre-existing ones.

Under the new rate, an average 10-year student loan of $28,000 will see the borrower pay an interest of roughly $10,000, constituting a 35% increase in cost for borrowers compared to a student who forgoes loans altogether. The new rate will also mark a $2,000 increase compared to the current rate.

The Fed had previously declared in December that three quarter-point interest rate cuts would take place over the course of 2024. However, as inflation has defied experts’ predictions and remained consistently high, the Fed has walked back those predictions and suggested that the rate cuts will not happen at all. At the Fed’s most recent meeting earlier this month, interest rates were held steady, remaining at their highest levels since 2001.