The borrowing cost for student loans is poised to reach a 16-year high.
The interest rate on a federal undergraduate student loan is expected to climb to 6.5% in July, which would mark its highest level since 2008, financial-aid expert Mark Kantrowitz told ABC News. The current interest rate of a new student loan is 5.5%.
The borrowing rate for student loans is set by adding a fixed amount of 2.05 percentage points to the yield on the 10-year Treasury bond, which is determined annually at a May auction. At the auction on Wednesday, 10-year Treasury bonds were sold at a 4.48% yield.
The yield for 10-year Treasury bonds, in turn, closely tracks the benchmark interest rate set by the Federal Reserve. That benchmark rate remained relatively low for years but has surged since 2022, when the Fed undertook an aggressive series of interest rate hikes to fight inflation. In response to rising interest rates, student loan rates have soared.
“It’s a shock because people had gotten used to low rates,” Kantrowitz said.
Since student loans are typically fixed, the forthcoming rate will apply to new loans but will not affect previous ones. The new rate will apply to loans for the 2024-2025 academic year beginning on July 1.
