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 Type||Markup||2023-24 Rate||2022-23 Rate|
|Direct Undergraduate Loan||2.05||5.498%||4.99%|
|Parent PLUS Loan||4.6||8.05%||7.54%|
|Direct Graduate Loan||3.6||7.05%||6.54%|
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 Loan||Direct Student Loan||Parent PLUS Loan|
|Accrued interest at repayment start||$1,361||$1,992|
|Loan balance at repayment start||$6,861||$7,492|
|Total loan cost||$9,020||$11,165|
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.