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.
