Interest rates on new federal student loans will rise by nearly 1% as of July. Here's what borrowers need to know

The interest rate on new federal student loans is going up.

The government sets annual interest rates on the debt once a year, and the percentage is based on the 10-year Treasury note.

Despite the uptick, rates remain low by historical standards, said higher education expert Mark Kantrowitz.

Although the U.S. Department of Education hasn’t formally announced the new rates for the 2021-2022 academic year, Kantrowitz has calculated what the new figures will likely be. By Kantrowitz’ estimations, the interest rate on federal student loans will climb by 0.98%.

“It is the fourth-lowest interest rate in the last decade,” he said.

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And due to the pandemic, the interest rate on most federal student loans has been set to zero through September.

Here’s what you need to know about the change.

Since the interest rate on federal student loans will climb by 0.98%, the rate on new undergraduate Stafford loans will rise to 3.734%, up from 2.75% for 2020-2021. This will increase monthly loan payments on a 10-year repayment term to $99.99 from $95.41 for every $10,000 in debt borrowed that academic year, according to Kantrowitz. 

For graduate students, Kantrowitz projects that Stafford loans will come with a 5.284% interest rate, compared with 4.3% now. This would push up monthly loan payments on a 10-year repayment term to $107.46 from $102.68 per $10,000 in debt borrowed, he noted.

Lastly, he expects PLUS loans for graduate students and parents will have a 6.284% interest rate, an increase from 5.3%. As a result, monthly loan payments on a 10-year repayment term will increase to $112.45 from $107.54 for each $10,000 in debt borrowed, Kantrowitz said.

All federal education loans issued after July 1, 2021, will be subject to the new rates.

You can’t try to evade the rate increase by borrowing ahead of that deadline. Loans for the 2021-2022 academic year must be taken out after July 1.

Don’t worry about loans you’ve taken out for previous academic years: Federal student loan rates are fixed, and the rates on those existing ones won’t change. 

The rate changes apply only to federal student loans. Private loans come with their own — often higher — interest rates.

Borrowers can use Kantrowitz’s calculator on his website to plug in their loan details and learn what they’ll end up owing.  

He recommends that students not borrow more than they expect to earn in their first year out of college. The average starting salary is $50,000, though there’s a wide range between professions.

President Joe Biden has said he’s in support of forgiving $10,000 in student loans per borrower, and there are currently reports from the U.S. Department of Education and the Justice Department pending on whether the president has the legal authority to cancel the debt without Congress.

The odds of some forgiveness happening have never been greater. Still, “until legislation is signed into law, you can’t count on anything,” Kantrowitz said.

“Students should not borrow more than they need, in the expectation that the debt will be forgiven,” he added.