Thinking of taking out a federal student loan this fall? Prepare for a higher interest rate

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Students planning to borrow federal student loans for the next school year, take note: Interest rates for new loans will rise by one percentage point on July 1, to over 3.7% for students undergraduate. The change comes as interest rates on existing federal student loans are set at zero percent until the end of September as part of coronavirus relief.

While the new rates are still close to historic lows, rates are reset in early July of each year according to a federal law formula based on the high yield of the last 10-year Treasury bill auction in May, plus a margin. depending on the type of loan. This means that federal student loan interest rates will increase for all new loans distributed between July of this year and June 2022, including those taken out for the fall semester.

“There is no discretion in setting these rates. To change the formula, Congress would have to pass a law, which is unlikely,” said student loans expert Mark Kantrowitz.

There may be fewer loans than in previous years, given that the percentage of 2021 high school students completing the Free Federal Student Aid Application, or FAFSA, to apply for college financial aid has fallen from 2020. Nearly of 52% of the class of 2021, down more than 5% from a year ago, filed for an application, according to the National College Attainment Network tracking. So far, more than 1.9 million applications have been completed – a necessary first step in obtaining a federally backed student loan – by the June 30 deadline. Louisiana had the highest completion rate with over 72% of high school students, while Alaska had the lowest at 28.5%. The largest declines were recorded in New Mexico and West Virginia.

University enrollments have taken a hit amid the pandemic, especially among those who have just entered. Undergraduate enrollment in spring 2021 was down 5.9% from the same time last year, according to the nonprofit National Student Clearinghouse. They found that undergraduate enrollment fell at all types of institutions, but community colleges were the hardest hit, down 11.3%. The most significant decrease was observed among 18 to 20 year olds.

Student loans are now the second largest amount of household debt in the United States, ahead of credit cards and car loans but behind home loans. The amount of student debt owed has exceeded more than $ 1.7 trillion, according to the Federal Reserve. And while a number of progressive lawmakers are calling on the president to unilaterally write off up to $ 50,000 per student loan debt borrower, the president has not included student loan cancellation in his federal budget proposal. of $ 6 trillion.

What to expect

Federal rates for the next school year include a 1% increase for Federal Direct Undergraduate Stafford Loans from 2.75% to 3.73%. Although this is higher than last year amid the pandemic, the new rate is still lower than what borrowers were charged from July 2011 to 2012, when the rate was set at 3.4%, according to government data.

For Federal Direct Stafford loans to graduates, the increase this summer is just under 1 percentage point, from 4.30% to 5.28%. Interest on Federal Direct PLUS loans will decrease from 5.30% to 6.28%. Interest rates will increase for loans to graduate or professional students enrolled at least half-time in a qualifying school or program, as well as the parent of a dependent undergraduate student enrolled at least half-time . These new rates for Federal Direct Stafford loans and PLUS graduate loans would still remain lower than loan rates from at least July 2006 to last summer, according to government data.

Repayment

Borrowers are not required to begin repaying federal student loans until they have graduated or left school. In most cases, depending on the type of loan, borrowers also have an additional six months after graduation before the first payment begins. For those in financial need, the government covers the interest while borrowers are in school at least part-time.

Currently, student loans are interest-free and all borrowers have been automatically forborne, meaning they temporarily don’t have to make monthly payments due to a federal debt break. coronavirus pandemic, put in place last summer and extended earlier this year.


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