Student loan rate increases are a daunting possibility for students planning on borrowing federal student loans each year. But unfortunately, student loan interest increases can be par for the course.
Federal student loan interest rates for the 2021-2022 school year have increased slightly from the 2020-2021 rates. If you’re worried about an upcoming student loan rate increase, and wondering if the federal government might be raising student loan interest rates in the coming years, read on for more information.
There’s no way to know for sure what will happen with federal student loan interest rates in the long term, but it could help to know the landscape, understand how the rates have gone up in the past, and look at what’s being proposed for the future.
The more you know, the more prepared you can be if you need to borrow another student loan.
Student Loan Interest Rates Change Annually
Under a law adopted by Congress in 1993, the federal government pegged federal student loan interest rates to the longer-term US Treasury rates, and those interest rates are adjusted annually for new federal student loans.
Each year, the new rates take effect on July 1 and apply to federal student loans taken out for the following academic year. Rates rose from the 2017–2018 to the 2018–2019 school years, but decreased for the 2019–2020 and 2020-2021 school years. For the 2021-2022 and 2022-2023 school years, student loan interest rates increased again.
Student Loan Rates for the 2022–2023 School Year
For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.In an effort to keep the interest rates on federal student loans from skyrocketing, Congress has set limits on how high-interest rates can go. Undergraduate loans are capped at 8.25%, graduate loans can’t go higher than 9.5%, and the limit on parental loans is capped at 10.5%.
If Your Loan Has a Variable Interest Rate, a Hike Could Be in the Cards
If you take out a federal student loan, the loan’s interest rate is fixed. This means the interest rate stays the same over the life of the loan.
When applying for a private student loan or refinancing an existing loan, borrowers can typically choose between a fixed and variable interest rate. The interest rate on a variable loan could fluctuate depending on market volatility.
When you take out a private student loan, the original rate depends on your credit score, employment history, and current income level—among other factors, which vary by lender.
If your loan has a variable rate, the rate fluctuates as the economy changes. You might have mixed feelings when rates alter. Generally, rates tend to decrease when the economy takes a hit, and they tend to increase as the economy strengthens.
How do you know if a rate hike is in the cards? We can never be 100% sure, but it might help to look at trends in the market. You could consider looking at the London Interbank Offered Rate (LIBOR) , an interest rate index that is updated daily and shows how rates change along with the economy.
If you look at the LIBOR index in 2019, you can see that variable rates were steadily increasing from 2014 to January 2019, but for the most part, they’ve been decreasing ever since.
Tuition and Fees Are Not Tax Deductible
The 2018 Tax Cuts and Jobs Act did not include an extension of the Tuition and Fees Deduction. In the past, taxpayers could use this tax provision to reduce their taxable income by up to $4,000 annually. The IRS currently has no plans to make tuition and fees deductible again in the future.
The Student Loan Interest Deduction May Be Eliminated
The 2018 Tax Cuts and Jobs Act originally proposed eliminating the student loan interest deduction, which allows individuals to deduct up to $2,500 annually on the interest paid on a student loan. Ultimately, this deduction wasn’t eliminated and is still available, but it’s an issue to be aware of.
The Takeaway
One way to navigate these changes is to refinance your student loans with SoFi, allowing you to choose a monthly payment plan and loan term that works for you. Certain private lenders only refinance private student loans, but SoFi gives you the option to refinance both private and federal loans.
Refinancing student loans involves taking out a brand new loan with a new interest rate. By refinancing, borrowers have the opportunity to make only one monthly payment instead of balancing multiple payments.
Individuals whose financial situation has improved since originally borrowing the loan(s) may qualify for a lower interest rate.
Those currently enrolled in an income-driven repayment plan or who are working toward loan forgiveness for federal loans, may find that refinancing is not the best option.
When federal student loans are refinanced, they are no longer eligible for federal borrower protections.
But someone worried about rising variable rates on private student loans may be able to lock in a competitive interest rate by refinancing.
When you refinance with SoFi, there are no origination fees or prepayment penalties. Take a look at SoFi’s student loan refinancing calculator to get an idea of what a new loan could look like for you.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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