Student Loan Interest Rates Still Rising Due to Covid

Following the Federal Reserve’s decision to keep interest rates where they are (around 5.25%) at their May meeting, student loan borrowers can expect to see the highest rates on new loans since 2008. The decision to not lower rates continues their efforts to curb inflation caused by the Covid-19 pandemic, but will also have lasting repercussions for student borrowers. Those taking out new loans starting July 1st will see a 1% rise in interest for the life of their loans, because the rate is locked in for the whole 2024-2025 academic year. This will only affect all new federal loans, and does not affect private loans.

Interest Rate Changes to Existing Student Loans

Unless you specifically borrow a “variable rate” student loan, chances are that your rate is fixed, which means that there’s nothing you or the bank can do to change it until it’s paid off. The two exceptions to this are if you refinance or consolidate. Both options essentially involve paying off the old loan(s) with a new one, so you really aren’t even changing the interest rate so much as exchanging it. Refinancing is done with a private lender, so they determine the interest rate of the new loan, which is partially dependent on the Federal Reserve’s base rate. 

Consolidation works very differently. If you’re consolidating with a private loan, it’s essentially the same as refinancing. Borrowers with federal loans, however, have the option to consolidate them into one Direct Consolidation Loan. These have been in the news a fair bit over the last couple of years, as borrowers have had to consolidate some of the older types of loans (such as FFELs) to take advantage of things like the Limited Waiver Opportunity or the IDR Account Adjustment. When consolidating existing federal loans, you don’t get a brand new interest rate based on the current market like you do for a private loan. Instead, your rate is based on a weighted average between your existing loans’ rates. 

For example, if you had two loans of equal value, one with a 6% rate and another with a 6.5% rate, the interest rate on your new Direct Consolidation Loan would be 6.25%. That means you can consolidate at any time and not have to worry about whether current interest rates will affect your future payments. 

Reminders for those pursuing PSLF: remember that refinancing is done with a private lender—there is no way to refinance through Federal Student Aid—which would make your loan(s) ineligible for loan forgiveness. Also, if you consolidate loans that are already in progress towards PSLF, the number of qualifying payments will be reset to zero. The only exception is if there is a special program like the LWO or IDR Account Adjustment, mentioned above. The first program has concluded, but the second has been extended until 6/30/2024!

If you have questions about interest rates, or are thinking about refinancing or consolidating, reach out to your student loan professional. They can guide you through the sea of numbers and find the best route forward for your repayment strategy.