By: Reyna Gobel MBA, MJ
The federal student loan interest rates are set around July 1st for the upcoming 2022 /2023 academic year. Whether or not $10,000 is forgiven by the Biden Administration, you need to think about how much to borrow, what the interest rates are, and all student loan options.
In this article, we’ll break down the interest rates by type of loan and offer borrowing alternatives.
Federal Subsidized Loans
Subsidized federal student loans are issued directly to undergraduate students. The federal government pays the interest for students enrolled half time or more. Not everyone qualifies for these loans based on financial need. This year’s interest rates are 4.99 percent compared to last year’s rate of 3.73 percent. These are the best kind of loans because of all the ways to postpone loan payments when needed. They’ll likely have the same or lower interest rate than private student loans. However, they are limited in amount offered, so they won’t nearly cover the cost of attendance. For instance, first-year students can only borrow up to $3,500 in subsidized loans.
Federal Unsubsidized loans
Unsubsidized federal student loans are issued to undergraduate, graduate, and professional student. The limit varies widely based on both dependency status and year in school. For instance, a first-year dependent student can borrow up to $5,500, while a graduate student could borrow $20,500 annually. The interest is also jumping from 5.28 percent this past year to 6.54 percent for the coming academic year. Private students loans may have lower interest rates, but they’re only an alternative to this type of loan if the student doesn’t have any chance of Public Service Loan Forgiveness.
Note: If you don’t have $10,000 in student loans, it may be best to borrow federally up to that amount over private because it’s more likely to be forgiven.
Parent and Graduate PLUS Loans
PLUS Loans for graduate students and parents are increasing from 6.38 percent to 7.54 percent. These loans are normally utilized after all federal subsidized and unsubsidized loans issued directly to students are exhausted for the year. The only reason to borrow them over private loans is if the borrower, parent or student, could qualify for income-driven repayment plans or Public Service Loan Forgiveness in the future.
Private Student Loans as An Alternative
Because the interest rates for an entire year were set when the economy was not suffering from inflation, private student loans with excellent credit may have lower interest rates based on current market conditions. Compare private student loan rates before deciding how much to borrow in federal student loans. Current fixed interest rates are as low as 3.34 percent as checked on June 13, 2022. That’s even lower than subsidized student loans!
Unfortunately, federal student loan interest rates are set once per year and may not be consistent with market rates. Thus, you students should generally borrow unsubsidized or subsidized loans if they may need income-based payments or qualify for Public Service Loan Forgiveness later. The same rule goes for parents. However, if these aren’t factors, it’s time to look at private lending as well if you already have $10,000 in debt. This is one of the times that the economy doesn’t match federal student loan interest rates.