If you take out federal student loans to pay for your education next year, they’re about to get more expensive.
The interest rate on direct federal undergraduate student loans — which are determined annually by Congress — will drop from 4.99% to 5.5% for loans disbursed on or after July 1, 2023, a door has confirmed. -word of the Ministry of Education. The rate will only apply to new loans and is fixed for the life of the loan.
The 5.5% interest rate applies to direct subsidized and unsubsidized undergraduate loans. Interest rates for undergraduate borrowers haven’t reached 5% since 2019. Existing federal loans have not earned interest since the pandemic payments pause and interest took effect in 2020. It should be completed this summer.
Prior to this, unsubsidized loan rates had not exceeded 5% since 2013, the last year they had a separate rate for subsidized loans.
Graduate student borrowers will also see their loan rates increase from 6.54% to 7.05% last year. The prices on More loans – which can be subscribed by parents on behalf of their children, or by graduate and professional students – will also increase from 7.54% to 8.05%.
While it’s generally a good idea to compare rates from various lenders before taking out a loan, student loans are a bit different. You may find a better interest rate with a private lender, but federal student loans come with advantages that might prove more valuable than a lower rate.
If you qualify for federal student loans and can avoid taking on more debt to pay for your education, here are a few reasons why it’s generally a good idea to stick with Uncle Sam.
1. Loan forgiveness
According According to the Supreme Court’s ruling this summer, all federal student loan borrowers earning less than $125,000 a year could have some or all of their debt forgiven — a benefit private borrowers are unlikely to receive.
In addition to President Joe Biden’s debt relief plan, federal loans can be canceled through other programs, including civil service loan cancellation and income-based repayment (IDR) plans. . You’ll have to work in the civil service for 10 years or make payments on an IDR for 20 or 25 years to see your balance released, but that’s more relief than most private borrowers will ever see.
Some private lenders forgive the balance of borrowers who die or become totally disabled, but there is no guarantee. Your federal loans will be canceled if you die, and you may be eligible for loan elimination if you have a disability that prevents you from working.
2. Better terms of interest
Although interest rates on federal student loans remain the same for the life of the loan, private student loans often come with variable interest rates, which can increase over time. This can complicate your repayment planning and cost you more in the end.
With federal loans, not only do you keep the same interest rate, but you won’t have to pay interest on subsidized loans while in school.
Subsidized loans are intended for borrowers who demonstrate financial need. The government covers the interest charges on these loans if you are in school at least part-time, for the first six months after leaving school and during periods of postponement, such as if you choose to return to school or if you need to suspend payments. due to financial circumstances.
3. Flexible repayment options
While Student debt in any form can be burdensome for borrowers, federal student loans come with a variety of repayment options aimed at helping you stay on top of your payments.
You can choose from a standard repayment plan to see your federal debt paid off in 10 years or explore IDRs, where monthly payments are set at a percentage of your disposable income.
Repaying your loans with an IDR plan may take longer – and therefore cost more interest – but they are designed to help you meet monthly payments and avoid the troubles caused by missed payments or defaults. payment on your loans.
A private lender can work with you to help manage your debt if you’re having trouble making your payments, but there are no guarantees. Even if your lender allows you to suspend payments for a while, your debt will likely continue to accrue interest.
Paying for college is not an easy task for many families. You need to do what works best for your situation, and the first step is to educate yourself about the different options available. Remember to apply for scholarships and financial aid to cover costs as well.
DON’T MISS: Want to be smarter and more successful with your money, your job, and your life? Subscribe to our new newsletter!
Get CNBC’s free report, 11 ways to tell if we’re in a recession, where Kelly Evans reviews the main indicators that a recession is approaching or has already begun.