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Why You Should Still Take Advantage of Student Loan Interest Rates Now

If you have plans to attend college in the fall of 2023, it's important to be aware that the opportunity to benefit from lower interest rates on federal student loans, which has been advantageous in previous years, is not as favorable anymore.

In May 2023, the Department of Education published the new federal student loan interest rates, and the numbers are the highest we’ve seen in a decade – for some rates, they're the highest ever.

If you’re looking for help paying for a college education, now isn't the best time to put federal student loans at the forefront of your financing plan. However, that doesn't mean prioritizing other loans over federal loans is the best approach, either.

Why you should still prioritize federal loans right now

Federal student loans, as a general rule, are a better option than private loans.

Loans taken out through the government are typically more flexible than private loans and give you access to income-based payment plans and loan forgiveness programs. Most federal loans don’t have credit requirements either.

Current student loan interest rates can still make the argument for federal loans more convincing, but not in all cases. For example, as of January 2023, private fixed-rate undergrad student loans charged an average interest ranging from 5.99% to 13.78%.

However, the new federal student loan interest rates were released in May 2023. Here's what you can expect in the fall of 2023 through most of 2024:

  • Undergraduate Direct Loans: 5.50%
  • Graduate Direct Loans: 7.05%
  • PLUS Loans: 8.05%

The interest rate for undergrads rose by about 10% from last year, with unsubsidized loans and PLUS loans also increasing as well. If you’re eligible for federal student aid, this might hike up your future student loan debt considerably.

One potential upside is that with the economy in a downturn, there’s a chance that 0% interest rates will continue to be extended further than originally planned.

Interest rate history for federal student loans

Federal student loan interest rates are set each year following the May Treasury Auction, based on the 10-year Treasury note rate. The Treasury note rate for this year is 3.72% (as of May 22, 2023), considerably higher than in recent years.

To get an idea of how current rates compare to past rates, take a look at these federal student loan interest rates from the past decade:

Federal Student Loan Interest Rates Since 2010

Disbursement dateUndergrad direct subsidizedUndergrad unsubsidizedGrad unsubsidized loansPLUS loans
7/1/23 – 6/30/245.50%5.50%7.05%8.05%
7/1/22 – 6/30/234.99%4.99%6.54%7.54%
7/1/21 – 6/30/223.73%3.73%5.28%6.28%
7/1/20 – 6/30/212.75%2.75%4.30%5.30%
7/1/19 – 6/30/204.53%4.53%6.08%7.08%
7/1/18 – 6/30/195.05%5.05%6.60%7.60%
7/1/17 – 6/30/184.45%4.45%6.00%7.00%
7/1/16 – 6/30/173.76%3.76%5.31%6.31%
7/1/15 – 6/30/164.29%4.29%5.84%6.84%
7/1/14 – 6/30/154.66%4.66%6.21%7.21%
7/1/13 – 6/30/143.86%3.86%5.41%6.41%
7/1/12 – 6/30/133.40%6.80%6.80%7.90%
7/1/11 – 6/30/124.50%6.80%6.80%7.90%
7/1/10 – 6/30/115.60%6.80%6.80%7.90%

You can see that the rates that were just released are well above where rates traditionally stood over the past 10 years. There’s no way of knowing whether this will continue beyond the upcoming academic year, so there is no specific time when borrowers can plan to lock in lower rates.

Federal student loan rates vs. private student loan rates

Our team at Student Loan Planner® has spent time vetting private lenders, so we only partner with the best options for our readers. If you look at the fixed-rate ranges through our lending partners, you’ll see that great rates are possible with private loans.

Something to keep in mind, though, is that the lowest rates you see are reserved for the highest-rated borrowers. To get those rates requires an almost “perfect storm” of the best credit score, along with stellar credit history and a cosigner.

For a borrower with good credit, think more along the lines of an interest rate typically between 5.5% and 6.5%. With that context, private loan rates may sometimes go head to head with the most recently released federal interest rates.

PLUS loans are one example where private loan rates might be more comparable, especially considering PLUS loans have an origination fee of around 4.25%. Borrowers looking at PLUS loans should do the math to see if they make more sense than private loans.

When are private student loans still an option?

With record-high federal student loan interest rates, we are in a strange time where there are some scenarios when private loans might make more sense to pursue. Here’s when it might make sense to apply for private loans instead of federal loans at current rates:

1. You missed out on the FAFSA deadline: The federal deadline to submit FAFSA forms online for the 2023-24 academic year is June 30, 2023.

2. You don’t have access to a cosigner: PLUS loans are the only federal student loans with a credit check. If you have poor credit and no access to a cosigner, your only option might be high-interest private loans that don’t require a cosigner.

Neither of these scenarios is ideal, but if you find yourself in one of these situations, private loans could become your best option.

Know your financing options before you go to school

Navigating student loan decisions isn’t an easy task. It’s one of the biggest financial decisions you’ll make in your lifetime. If you’re trying to determine the right course of action, our student loan consultants can help you design the perfect plan for managing student loan debt repayment in the future. Book a pre-debt consult to save yourself the aggravation and stress that can come with poor student loan choices.

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