Each July, Federal student loan interest rates are reset for the upcoming school year using the formula of 10-Year Treasury Rate + 2.05%. Currently, as of today, May 12, 2022, with the recent .5% interest rate increase, the 10 year Treasury interest rate is 2.91%.
Thus, although the Federal student loan interest rates are fixed for the life of the loan, borrowers are poised to pay 4.99% interest on any loans assumed in the 2022-23 school year. Potential 2022-23 interest rates will be the highest since the 2018-19 school year, 5.045%, and a decade before, just following The Great Financial Crisis of 2008, when interest rates were 5.6%.
Thus, effectively, for those borrowing to attend college, they’ve added more overall costs to earn their college degrees, which will compound over the lifetime of their loans. For example, if a student assumes $5,500 in Federal Student Loans for the 2022-23 school year, the typical Federal limit on loans, students can expect to pay $1,497 in interest over the 10 year life of the loan at the projected 4.99% interest rate.
Students would be wise to discuss their tolerance for such additional costs with family, trusted advisors, and financial aid staff at their university, exploring other options to pay for college expenses year by year before assuming what might be unnecessary and now more costly student loans.
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