Student loan rate increases are a daunting possibility when you’re facing taking out more loans every year. But unfortunately, student loan interest increases can be par for the course. If you’re worried about an upcoming student loan rate increase, and wondering if the federal government might be raising student loan interest in the coming years, read on for more information.
There’s no way to know for sure what will happen with student loan interest increases, but it helps to know the landscape, understand how the rates have gone up in the past, and look at what’s being proposed for the future.
Student Loan Interest Rates Change Annually
Federal law determines the interest rates for federal student loans each year. Under a formula adopted by Congress in 1992, the federal government sets rates annually for new student loans.
Each year, the new rates take effect on July 1 and apply to loans taken out for the following academic year. Under this formula, rates can increase, decrease, or remain the same, but 2018 is the second consecutive year that the federal student loan interest rates increased. You can check out what the student loan interest rates in 2019 are here.
Student Loan Rates Could Continue Increasing
The interest rates on Direct Subsidized and Unsubsidized Student Loans for undergraduates increased to 5.05% from 4.45% for the 2018 to 2019 academic year, according to the U.S. Department of Education . Student loan interest rates increased by 0.595% for any new loans made on or after July 1, 2018 and before July 1, 2019.
Student loan interest rates also increased for Graduate or Professional Direct Unsubsidized Student Loans—rising from 6% to 6.6%. Rates on Direct PLUS loans, which are available to parents and graduate students, increased from 7% to 7.6%.
In an effort to keep the interest rates on 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
When you borrow a private student loan or are refinancing an existing loan, you can typically choose between a fixed and variable interest rate. A fixed loan rate means the interest rate stays the same over the life of the loan. But if you take out a loan with a variable rate, the interest rate could fluctuate depending on market volatility.
Anticipating Changes to Loan Forgiveness
It’s no secret that President Trump and Education Secretary Betsy DeVos have called for the elimination of Public Service Loan Forgiveness (PSLF). PSLF forgives the remaining balance on Direct Loans after borrowers have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying government agency or nonprofit organization.
In fact, President Trump’s 2020 budget proposes eliminating the PSLF program and slashing the Department of Education’s budget by 10%. However, with a Democrat-controlled House, the budget is certainly not guaranteed to be approved by Congress.
Student Loan Repayment Could also Change
In the past, President Trump has proposed combining two of the existing income-driven repayment plans—Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE)—into a single plan. However, there are still important differences between the two plans as of writing this.
For instance, borrowers can qualify for PAYE if they demonstrate substantial financial distress and are a new borrower.
Meanwhile, anyone with a federal student loan can qualify for REPAYE, except parents who were awarded PLUS loans. (Parent PLUS Loans can still qualify for income-contingent repayment plans, though. It can get a little complicated, but you can learn more here .)
Tuition and Fees Are No Longer Tax Deductible (for the 2018 Tax Year)
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 Student Loan Interest Deduction May Be Eliminated
The Tax Cuts and Jobs Act originally proposed eliminating the student loan interest deduction, which allows for you to deduct up to $2,500 annually on the interest you pay on a student loan. Ultimately, this deduction wasn’t eliminated and is still available, but it’s an issue to be aware of.
Refinancing Your Student Loans with SoFi
One way to navigate all 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.
If you’re currently enrolled in an income-driven repayment plan or are working toward loan forgiveness, refinancing may not be the best option for you because you lose access to federal loan benefits when you refinance. But if you’re worried about rising variable rates on private student loans or are interested in seeing if you qualify for a new (often lower) interest rate, now may be the time to look into refinancing.
When you refinance with SoFi, there are no origination fees or prepayment penalties. Take a look at our student loan calculator to get an idea of what a new loan could look like for you. When you’re ready to refinance, you can start the process easily online and get a quote from SoFi in just a couple of minutes.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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