Rising interest rates are a boon to savers but a curse to borrowers. And just like mortgages and credit cards, next year’s student loans will have higher rates. Federal student loan interest rates are based on the 10-year Treasury yield at the May auction. That auction took place last week, so next year’s interest rates are set.

Each loan type– Direct Student Loan, Parent PLUS Loan, and Grad Student Loan– has a fixed markup from the 10-year Treasury yield. The yield was 3.448%, an increase of just over half a percent from last year. Markups and corresponding interest rates for the coming school year and previous school year are:

Loan TypeMarkup2023-24 Rate2022-23 Rate
Direct Undergraduate Loan2.055.498%4.99%
Parent PLUS Loan4.68.05%7.54%
Direct Graduate Loan3.67.05%6.54%
Federal student loans have fixed interest rates for their lifetimes. That means that student loans taken out for the 2023-24 school year will have a 5.498% rate until they are paid off. Last year’s student loan will keep its 4.99% rate until it is paid off. “School years” for student loan purposes, run from July 1 through June 30. So any loan disbursed between July 1, 2023 and June 30, 2024, will have the above interest rates.

Federal student loans also have fees: 1.057% of the loan for direct undergraduate or graduate loans and 4.228% for PLUS loans.

Parents sometimes choose Parent PLUS loans over student loans because they don’t want their student to graduate with debt. I generally recommend that families start with the direct student loan because of the lower interest rate and fees. Here are lifetime costs for the two loans for a first-year student, assuming the maximum $5,500 is borrowed (unsubsidized) in either loan, using a 10 year repayment period.

$5,500 LoanDirect Student LoanParent PLUS Loan
Origination fee$86$233
Accrued interest at repayment start$1,361$1,992
Loan balance at repayment start$6,861$7,492
Monthly payment$74.45$91.10
Total loan cost$9,020$11,165
In addition, because of the high cost of Parent PLUS loans and the low borrowing limits for direct student loans– $5,500 for first-year students, $6,500 for second-year students and $7,500 for remaining years– most families are better off borrowing the direct student loan every year rather than delaying borrowing and taking out both the direct student loan and Parent PLUS loans in later college years.

There are limited situations where Parent PLUS loans do make sense instead of the direct student loan. For example, a parent working in the public sector, with a minimum 10 year career timeline following their student’s graduation might be eligible for public service loan forgiveness.

Higher interest rates always mean one thing: borrowers need to be more mindful of how much they are borrowing. Students who are able to earn high wages for summer jobs would be well-served to use that money to reduce borrowing as much as possible.