Get Ready for Higher Student Loan Interest Rates

Get ready for higher interest rates on federal student loans for the upcoming academic year, and not just because rates are currently zero due to an extended pause as a result of the coronavirus pandemic. Interest rates on federal student loans will rise because long-term interest rates are rising.

Federal student loan rates are based on a formula linked to the highest yield on the 10-year Treasury note auction in May. That auction this year is tentatively set for May 12.

Yields on undergraduate loans are set at 2.05% above the high yield in the May 10-year Treasury note auction. Graduate student loan rates are set 3.6% above the high yield May auction rate, and Parent PLUS loans are set 4.6% higher. If the high yield in the May 10-year Treasury auction is 1.5%, for example, the rate on federal undergraduate loans would be 3.55%.

That’s well above the 2.75% set for the current academic year, but that rate, along with interest rate on all other federal student loans, was slashed to zero when the federal government issued a moratorium on student debt payments effective mid-March 2020. The moratorium was set to expire on Sept. 30, 2020, but was extended three times — twice by then President Donald Trump and once by President Joe Biden. It is now set to expire on Sept. 30, 2021.

Borrowing in the current academic year is much lower than it typically is because of the pandemic, says student aid expert Mark Kantrowitz. Many students have been taking remote classes at home and not paying for room and board or paying less for those costs, having received partial refunds on earlier payments.

Student loan borrowing will rise in the coming academic year if schools open for in-person instruction in the fall, as many are expected to, says Kantrowitz.

Decision Day Changes

Other changes for incoming college students this year: a later Decision Day, falling after May 1,  the traditional deadline for students to confirm their acceptance at a particular school; and a different competitive environment to secure a spot in many top-rated schools.

As a result of a federal court decision in a lawsuit filed by the U.S. government against the National Association for College Admission Counseling, colleges can no longer impose the First-Year Undergraduate Recruiting Rule, which limited the ability of colleges to offer additional financial aid or other incentives in certain circumstances.

The limits applied to a potential incoming student who hadn’t responded to the acceptance letter by May 1, had declined acceptance to attend by May 1 or had failed to withdraw their application or deposit funds to secure their place by May 1. The court federal government won the case on antitrust grounds.

Some schools will still stick to the May 1 deadline but some are relaxing it, according to Kantrowitz.

Some of the most prestigious colleges in the U.S. have pushed back acceptance dates for  another reason: an overwhelming increase in the number of applications. Some of those schools and others have also suspended the required use of standardized test scores in admission applications and are looking to expand the diversity among the student population. Both moves open the door for more students to apply and for a more diverse group of students to be accepted.