How changing interest rates will affect student loan payments in 2023

As anticipation builds around President Biden’s student loan forgiveness plan and the Federal Reserve continues to raise national interest rates, you may be wondering how all of this impacts rates for new student loans. The Supreme Court will begin hearing arguments over Biden’s plan for one-time student loan forgiveness on February 28th. There has been significant turmoil over the legality of the president’s plan, and it is difficult to say what the Supreme Court will decide or how long that decision might take.

On top of this anxiety surrounding student debt forgiveness, the Federal Reserve has again raised national interest rates. On February 1st, the Fed raised rates by a quarter of a percentage point and is likely to do so at least two more times this year. While rates will not rise nearly as much in 2023 as they did in 2022, they will still be higher than they have been in a decade, and there is not much evidence that these rate hikes are helping inflation, which is still high. Bankrate experts predict that the federal funds rate will reach 5.25 to 5.50 percent in 2023

For those who currently have federal student loans or fixed-rate private student loans, the actions of the Federal Reserve will not impact the rates you pay. However, the Federal Reserve’s rate hike will impact the rates of new Federal loan borrowers and those with variable-rate loans. Likewise, decisions surrounding student debt relief will not impact rates for new borrowers.

If you currently have a federal student loan eligible for one-time debt relief and are thinking about taking out another, it could be wise to wait for the Supreme Court’s decision before taking out a new loan.

Bankrate insight

Student loan interest rates are expected to rise during the 2023-2024 academic year. Student loans expert Mark Kantrowitz predicts that “interest rates for 2023-24, which go into effect on July 1, 2023, to be 7% for undergraduate Stafford loans, 8.5% for graduate Stafford loans, and 9.5% for Parent PLUS and Grad PLUS loans.”

Interest rates data

The key to understanding current Federal student loan interest rates is understanding how the rates are set, as well as historical trends.

“The first thing to understand is how the interest rates are set. Most people don’t understand that,” says Mark Kantrowitz. “So, the interest rates change each July 1st based on the last ten year treasury note auction in May. Then, you take the high yield of that auction and you add a margin of 2.05% to get the undergraduate rate, 3.6% for the graduate rate, and 4.6% for the Plus loan. And there are caps. 8.25% for the undergrad, 9.5% for the Grad and 10.5% for the Plus.”

Here is some other key data about student loan interest rates:

• The current interest rates for federal student loans are 4.99 percent for undergraduate loans, 6.54 percent for graduate loans and 7.54 percent for unsubsidized and Direct PLUS loans
• The average federal student loan interest rate is 6.36 percent.
• Interest rates for private student loans range from 4 percent to 15 percent.
• Historically, federal student loans have gone through cycles of fixed and variable rates.
• Federal student loans have had fixed interest rates since the 2006-2007 academic year.
• The historical average interest rate for Federal student loans is 6.8 percent.
• Private student loan lenders typically offer both fixed and variable-rate loans.
• Private student loan rates tend to follow the trend of federal student loan rates.
• The fixed interest rate for graduate and professional students with federal loans was 6.8 percent from 2006 to 2012.
• The Federal government began adjusting interest rates on student loans annually in 2013.

Resources for resuming student loan payments

Even if you are eligible for student loan forgiveness, it is a good idea to be prepared if President Biden’s plan does not go through. Payments have been paused for the past three years, and Americans have not had to worry about budgeting for their student loan payments. Those that have graduated since 2020 will be making payments for the very first time.

There are bound to be some growing pains as payments restart. James Kvaal, Undersecretary of The U.S. Department of Education, stated in a recent court filing that if the government cannot provide debt relief, there could be a “historically large” rise in delinquencies and defaults.

Even if Biden’s debt relief program goes through, not everyone who applied will have their debt erased.

“Not everybody who qualifies for forgiveness is going to have their debt fully erased,” says Kantrowitz, “I estimated in the early days that about a third of borrowers [who applied for student debt relief] would have their debts erased… I still think it’s probably going to be about a third. So that means that two-thirds of those who applied are still going to be in repayment.”

Not everybody who qualifies for forgiveness is going to have their debt fully erased.

If you have federal student loans and are worried about the payment restart, here are some things you can do to prepare:

Calculate your payments

Whether you have made loan payments before or you will be making payments for the first time, you should make sure you know exactly what your payments are going to be and what your interest rate is. This information is generally available through your loan servicer, but you can also calculate your monthly payments to make sure you know what to expect.

Start budgeting now

Since there is still some time before the student loan payment pause ends, you still have time to start budgeting and setting aside funds for your loan payments. Creating a monthly budget and tracking your expenses could help you cut out unneeded spending and set your financial priorities straight.

Contact your student loan servicer ahead of time

Since loan payments have been paused for three years, student loan servicers will likely be overwhelmed with calls and inquiries when payments restart. If you have questions or concerns about your loans or the repayment process, it is a good idea to go ahead and contact your loan servicer. They can tell you about your repayment options and help you prepare for repayment.

How can you reduce your total loan cost?

There are several ways to reduce the total cost of your student loan. If you have a federal student loan, you could look into an income-driven repayment plan or consolidate your debt. Some states also offer student loan forgiveness programs, and some employers offer tuition reimbursement programs.

If you have private student loans, signing up for automatic payments, choosing a shorter repayment period, making early payments, or refinancing your loan could help you lower the overall cost of your loan.

What increases your total loan balance?

Your student loan balance goes up as interest accrues, and missing payments can lead to any unpaid interest being added to the principal balance of the loan. The most common reason for an increase in your student loan balance, especially if you have federal student loans, is late and missed payments.

However, it can also depend on your payment plan. For example, if you sign up for an income-driven repayment plan, your monthly minimum payments may be too low to cover accruing interest. In that case, any unpaid interest would be added to your total loan balance.

When do student loans resume?

Student loan payment will resume either 60 days after the Supreme Court rules on Biden’s debt relief plan or 60 days after June 30th, 2023. This means that payments could restart as early as May 2023 or as late as September.

If the Supreme Court can come to a quick decision, payments could resume in May or June. If the Court waits until the end of the term in June or July, repayments could start in August or September. Either way, the national student loan payment pause is ending soon, whether Biden’s debt relief plan goes through or not.

The bottom line

Federal interest rates for new student loan borrowers will rise for the 2023-2024 academic year, partly due to rate hikes by the Federal Reserve and partly due to overall historical trends. Rates will be higher than they have been in years, at 7 percent for undergraduate Stafford loans and 8.5 percent for graduate Stafford loans, but these rates are roughly on par with the historical average rate of 6.8 percent. While this rise in rates will not impact current borrowers with fixed rates, new borrowers and those with variable rates should budget accordingly.

Between this rise in federal student loan interest rates, the turmoil around Biden’s student debt relief plan and the looming threat of a potential recession, it is extremely important that borrowers save money where they can and plan before payments restart.