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Students returning to campus this fall are considering higher interest rates on their federal student loans.

The fixed interest rate on federal student loans rose to 3.73% for undergraduate loans, from 2.75% for loans issued July 1 to June 30, 2022.

The fixed rate for Direct PLUS loans, which can be taken out by parents and graduate or professional students, has increased from 5.3% to 6.28%.

Keep in mind that the new rates do not apply to private student loans or federal student loans taken out earlier to attend university.

What seems like a heavy hike, however, needs to be put into perspective. A bit like the moans about rising gasoline prices at the pump this summer. Just over a year ago, we were talking about federal student loan rates falling to historic lows.

The economic turmoil during last year’s pandemic caused all kinds of prices to drop back then – and now we’re shocked to pay more as the economy recovers.

“Interest rates last year were at or near all time highs,” said Mark Kantrowitz, student loan expert and author of “How to ask for more college financial aid”.

Kantrowitz noted that the 3.73% interest rate for federal undergraduate student loans is still low compared to 4.529% for the 2019-2020 school year and 5.045% for the 2018-2019 school year. .

In contrast, he said, the most recent rate spike occurred from the 2006-07 school year through the 2012-13 school year, when the interest rate on unsubsidized federal direct loans de Stafford was 6.8%.

The latest student loan rates remain a steal, Kantrowitz said, and are in fact the fourth lowest rates in the past decade.

Rates rose due to fluctuations in the bond markets. Federal student loans are pegged to the yields of the last 10-year treasury bill auction in May, when inflation concerns increased.

Granted, 10-year T-bill yields fell in early July, but that won’t help federal student loan rates for new loans, which reflect the rise in yields a few months ago.

Some experts have blamed the recent decline in Treasury yields – which fell to the lowest since February on July 7 – to fears that the economic recovery could accelerate quickly.

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What student loan borrowers need to know:

How much can you borrow?

“Students should always borrow as little as they need, not as much as they can,” Kantrowitz said.

So it’s best to think about where you can cut costs and get extra cash first. Even now, you might have time to find a job or work more hours this summer to reduce your debt.

A good rule of thumb is to aim to have total student loan debt upon graduation that is less than your starting annual salary.

Undergraduates can borrow between $ 5,500 and $ 12,500 in federal student loans each school year. The maximum will depend on your year of study and whether you are a dependent or independent student.

Often, parents can borrow more money through a Federal Direct PLUS loan. The maximum amount of the Direct Plus Loan that can be borrowed is the cost of participation, less any other financial aid received.

Graduate or professional students can borrow a maximum of $ 20,500 per year in federal unsubsidized direct loans, which have a rate of 5.28%.

Will the 0% period be extended?

Borrowers who are out of school and making payments on their student loans can hope that another extension of pandemic relief is imminent.

But many people who already have student loans would be better off planning as if they had to start paying off federal student loans again as of Oct. 1, according to Robert Humann, director of revenue at Credible, which offers an online marketplace to purchase fares.

As part of the effort to fight the pandemic, student loan borrowers have been allowed to suspend payments and pay 0% interest on most federal student loans since March 2020.

The forbearance period will run until September 30 and from October 1 your old higher rate would go into effect and you will have to start making monthly payments on your student debt again.

There is some buzz being created to extend the financial relief until the end of 2021 or perhaps even until March 2022.

But putting money aside now to make payments can help in the long run.

How likely is it that my student loans will be canceled anyway?

All the buzz these days remains about the possibilities of canceling student loan debt.

President Joe Biden supports forgiveness of up to $ 10,000 in federal student loan debt per borrower. Warren-Schumer’s more sweeping proposal calls for forgiving up to $ 50,000 in federal student loan debt.

Just because there is hope that some student loans will be canceled in Washington, however, doesn’t keep borrowing money now to go to college.

“It is not necessarily a good financial strategy to base the financial decisions of your life on different postures on the part of the people of Washington,” said Humann.

We don’t know what’s really going to happen. And borrowers should remember that private student loans – which were not relieved during the pandemic through the CARES Act – face a very high chance of not seeing a loan forgiveness down the road.

Should I choose a private student loan instead of a federal student loan?

Students should consider funding their education through a three-step process, Credible’s Humann said.

First, you want to make money through part-time jobs, savings, family gifts, grants, and scholarships.

Second, you want to maximize whatever is available to the student when it comes to federal student loans. Federal student loan rates are low, and you may later qualify for certain benefits, such as income-based repayment plans and some loan cancellation programs.

Kantrowitz noted that even Parent PLUS loans are eligible for certain federal student loan exemption programs, such as the Public Service Loan Exemption, but not the Teacher Loan Exemption. Parent PLUS loans are also eligible for discharge in the event of death and disability.

Third, you often have to fill this gap with more loans.

Some borrowers, Humann said, may want to take advantage of extremely low rates on private student loans instead of turning to higher rate Parent PLUS loans to close the gap.

But you will need to compare the rates available to you, determine if the rate is variable and could go up, or if the low rate is fixed. You will also need to determine if you would need a co-signer as a parent to get a better rate. On co-signed loans, the co-signer credit score is used if it is higher than the borrower’s score.

Private student loans often take credit rating into account; Parent PLUS loan rates are not risk-based and everyone pays a fixed rate of 6.28% for PLUS loans taken out from July 1 to June 30, 2022.

The rates for private student loans will vary widely depending on the credit. Some variable rates range from 1.04% to around 13%.

According to Credible data, a borrower with a high credit score of 780 and above could consider a 10-year fixed private student loan rate of 5.01%.

In contrast, the 10-year fixed private student loan rate was 9.82% for those with a credit score between 600 and 639.

During the week of July 5, according to Credible, 10-year fixed-rate private student loan rates were on average 5.27%, down from 5.47% the week before and 5.85% a year ago. year. Private student loan rates were at an all-time low of 4.99% during the week of March 29, 2021.

If you are not educated and need to make payments on your private student loans, you may want to consider refinancing these loans to take advantage of the lower rates currently available. But Humann noted that you don’t want to refinance federal student loans while the pandemic-related forbearance programs are in place.

Should Parents Use a Home Equity Loan to Cover Tuition Costs?

It is not a strategy that is likely to work for everyone.

“The rate is better with home equity borrowing or refinancing with cash, but that’s probably the only benefit,” said Greg McBride, chief financial analyst for Bankrate.com.

Home equity rates, he said, range from introductory rates as low as 1.99% to rates above 7%.

But McBride warns that you are using your home as collateral for the loan, that the interest is not tax deductible as before, and that you will lock in valuable borrowing capacity.

“What happens,” he asks, “if you need a new roof next year but don’t have the equity to borrow? “

A federal tax deduction for interest paid on student loans remains for loans you have taken out for yourself, your spouse, or your dependent. The tax relief applies to federal and private student loans used for higher education. The maximum deduction would cover up to $ 2,500 per year in interest.

It is important to note that federal student loan rates are fixed rates and will not increase after you have already purchased one. But a home equity line of credit could be subject to higher rates in the future if interest rates rise, McBride said.

“Unless you’ve already established a line of credit, using your home equity won’t be instantaneous – nor free. A cash mortgage refinance or the launch of a new home equity line will take a few weeks due to the need for appraisal, title, loan approval and a cancellation period after the loan. fencing.

McBride said families may want to reconsider the amount spent on education costs if a child needs to find more ways to borrow money after using the full amount of federal student loans allowed in one. year.

“Maybe the answer isn’t for parents to dip into their home equity for the rest. Maybe the answer is to find a school that is cheaper or one with more generous help. “

Contact Susan tompo vthat is to say stompor@freepress.com. Follow her on Twitter @tompeur. To subscribe, go to freep.com/specialoffers. Rlearn more about business and join our company newsletter.