Federal Student Loan Interest Rates Just Went Up 13%—What It Means to You

Julissa Treviño Updated on July 31, 2018

As you prepare to pay for your next year of college, it's important to be aware of a major change to federal student loans. As The Los Angeles Times recently reported, a hike in interest rates on federal loans has been approved for 2018-19.

What does it mean to you? While a jump in interest rates is never good news, your monthly payments aren't likely to increase by more than a few dollars a month. However, this rate hike should be powerful motivation to find other ways to fund your college education besides loans. 

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Federal student loans are issued by the U.S. Department of Education, which then assigns them to private companies loan servicers to handle payments and other customer issues.

Interest rates for these loans are set by the government each year and they are not retroactive, so the change only affects new loans. That means any existing loans you have will retain the same interest rates they already had. 

What's changed?

For the second year in a row, rates on federal student loans have gone up. Here are the new rates for the 2018-19 school year:

  • Undergraduate loan rates are now 5.05%, a 13% increase from last year.
  • Unsubsidized graduate student loans are now the rate is 6.60%, up from 6%.
  • Parent and graduate PLUS loan rates are now 7.60%, up from 7%. 
     

How the math looks

As the Times points out, this increase basically amounts to $3 more on each monthly payment on a $10,000 loan, compared to what you would have paid in past years. However, keep in mind that average student loan debt is around $37,000.

If you plan on taking out federal loans this year, here are other important details you need to know:

  • These new interest rates apply to loans disbursed from July 1, 2018, to June 30, 2019.
  • These rates are locked in for the life of the loan until you pay it off.

Are federal student loans still a good deal?

Absolutely. Federal loans are still considered among the best type of financial aid because it's much easier for borrowers with little to no credit history, who have less-than-excellent credit,  or who don't have a cosigner to get approved.

Though the new rates are now creeping up much closer to the rates offered by private lenders, federal loan rates are still often lower for some borrowers. 

There's also another good reason to choose federal loans:  There are more repayment options and benefits, like Public Service Loan Forgiveness.

What are alternatives to federal student loans?

You should consider all of the following options to fund your education or lower your college expenses, and talk to your parents about the options:

  • Grants: Grant programs are essentially free money that you don't have to repay. Some of these, like the Pell Grant, may be determined by your FAFSA application. 
  • Scholarships: There are thousands of scholarships out there, many of them with specific requirements and purposes. Try our Scholarship Database to start your search.
  • Work-study: These programs offers the opportunity to earn money for college by providing part-time campus jobs. These are often contingent upon availability of jobs and hours as well as funding. 
  • Private loans: Getting a loan through a private lender can help fill the financial gap between financial aid and the cost of your education. If you have a good credit history and/or a parent who can cosign, you'll have a better chance to get a better interest rate.
  • Refinancing: If you have good credit, you may be able to refinance existing student loans to get a lower rate. 
  • Choosing a more affordable option: You don't have to attend a $50,000-a-year school to get a great education. Choosing community college in the first year or two before completing your degree at a four-year university cuts down expenses significantly. If you want to see how colleges stack up when it comes to cost, try our NitroScore tool to compare. 
See also: Subsidized vs. Unsubsidized Student Loans: What’s the difference?

Published in: How to Pay for College

About the Author
Julissa Treviño

Julissa Treviño is a writer and journalist based in Texas. Her work has appeared in BBC Future, CityLab, Columbia Journalism Review, The Dallas Morning News, Racked, Teen Vogue and other publications. She enjoys traveling, playing with makeup, biking and trying new food. Follow her @JulissaTrevino. Read more by Julissa Treviño

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