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High Interest Rates Set to Increase the Cost of Student Loans in 2024

Higher student loan interest rates could cost students over $3 billion in additional interest for loans taken out in this year alone

On July 1, interest rates for new federal student loans rose to their highest levels since before the Great Recession. Interest rates for undergraduate loans have increased to 6.53% this year, nearly a 19% increase over last year and a 44% increase from just five years ago. For graduate and parent borrowers, costs were raised to their highest levels since 2006, with interest rates set over 9% (Figure 1). These higher interest rates could cost students over $3 billion in additional interest for loans taken out in this year alone.1

Figure 1: Federal Student Loan Interest Rates, 2006 - 2024

Figure 1 is a line graph tracking the interest rate on three different types of federal student loans from 2006 to 2024. The first, undergraduate unsubsidized (and subsidized since 2013), was at a 6.8% interest rate in 2006. The rate then decreased every year until it hit just over 3% in 2011, the remained between 3-5% until it decreased below 3% in 2020 and has increased sharply ever since, reaching 6.53% in 2024. The Graduate Unsubsidized rate began at 6.8% in 2006, dipped to just over 5% in 2013, and reach its low point at just over 4% in 2020. It has since increased every year, and is at 8.08% in 2024. The rate for Direct PLUS loans started in 2006 at 7.9%, dipped to just over 6% in 2013, then hit its low point at just over 5% in 2020. It has increased every year since to reach 9.08% in 2024.

Borrowers Will Pay Substantially More

Increasing student loan interest rates will cost borrowers thousands of dollars. For example, for an undergraduate student leaving school in 2025, a student loan for the final year of college will cost $466 more compared to the same loan taken out just one year ago. For a graduate student or parent borrower, their final year of student loans will cost $497 more (Figure 2). And these additional costs are for only one year of borrowing, so the true cost of the increased rates could be much higher. Although student loan borrowers may be able to lower monthly payments through income-driven repayment plans, interest continues to accrue under most plans, and borrowers may be unaware of these repayment plans , have difficulty accessing them or, in some cases, may still struggle to make ends meet despite the availability of these options.

Figure 2: Difference in Repayment Amounts for a $7,500 Student Loan Taken Out in 2024-2025 Compared to the Prior Year2

Repayment Plan Difference in Lifetime Repayment (Undergrad) Difference in Lifetime Repayment (Graduate) Difference in Lifetime Repayment (Parent PLUS)

Standard Repayment

$466

$485

$497

Graduated Repayment

$615

$655

$576

SAVE Plan

$0

$0

Ineligible

Borrowers Have Few Good Options When Rates Rise

Federal student loans are unusual compared to many private credit products because interest rates are fixed by a formula defined by Congress. Even if interest rates decrease for future student loan originations, the rate on federal student loans remains the same throughout the repayment period. As a result, borrowers who take on federal student loans this year will always make higher payments than others who borrow in a lower interest rate environment.

This leaves borrowers caught between two choices: (1) a lower rate through private loans which could help them afford everyday essentials, but cost them the important protections that come with federal student loans, or (2) a loan with a higher rate that comes with the protections of a federal student loan.

The CFPB is also aware that private lenders may overstate the savings and benefits of their products. We recently observed instances where private student loan servicers improperly denied benefits to eligible borrowers and failed to honor legal protections afforded to all borrowers by law. Additionally, borrowers frequently report problems they have with private student loans to the CFPB, such as improperly assessed fees, improperly denied deferment requests, frustration with ballooning balances, and misleading information during the origination and refinancing processes.

The CFPB will continue to examine the effect interest rates have on borrowers, and it will ensure that student loan companies comply with federal consumer financial protection laws.

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Endnotes

  1. There were 6.8 million Direct Loan recipients in FY 23 and, under a standard repayment plan, the increase in federal student loan interest rates would result in a typical 2024-2025 borrower paying approximately $466 more in interest. See Figure 2. See also U.S. Department of Education, Office of Federal Student Aid, (Nov. 16, 2023), Fiscal Year 2023 Annual Report, www2.ed.gov/about/reports/annual/2023report/fsa-report.pdf at 15.

  2. This analysis estimates student loan repayment amounts for a borrower who borrowed $7,500 in federal direct subsidized and unsubsidized undergraduate loans, $7,500 in graduate loans, or a $7,500 in Parent PLUS loan in their final year of study. The borrower earns the national median individual $40,480 salary that increases at a rate of 3 percent annually after graduating in 2024 or 2025. This would mean $5,500 subsidized and $2,000 unsubsidized loans, with a 5.5 percent, 7.05 percent, and 8.05 percent interest rates for the undergraduate loans, graduate loans, and PLUS loans respectively for 2024 graduates and 6.53 percent, 8.08 percent, and 9.08 percent interest rates for undergraduate and Parent PLUS loans for 2025 graduates. These values were populated into the Office of Federal Student Aid’s Repayment Simulator Calculator at https://studentaid.gov/loan-simulator/repayment/wizard/personal-info/select-what-applies , which assumes that inflation will be variable over the repayment period, with a higher level now and a lower level in the future. Poverty levels are also adjusted based on these inflation estimates. For average annual salary, see Real Median Personal Income in the United States (MEPAINUSA672N) | FRED | St. Louis Fed (stlouisfed.org) .