Federal student loan rates rise more than 1% in just one year

Each spring, Congress sets new interest rates on federal loans for the upcoming college year. Rates are based, in part, on government bond yields, which remain high in the face of lingering inflation.

What are the new loan rates? Rates for undergraduate students increased from 5.5% to 6.53% and now stand at 12-year highs. Loans for parents went from 8.05% to 9.08%, the highest rate in more than two decades.² These rates apply only to federal loans. Private lenders typically charge even higher interest.

Who’s affected? The new rates apply only to loans taken out for 2024-25 and remain in effect for the life of the loan. Because federal loan rates are fixed, families with debt from previous years will not see any changes to their interest rate or monthly payments.

What’s the impact? Families borrowing today are locking in higher rates for 10 or more years after college, when graduates can least afford the monthly payments and parents are trying to save for retirement. And those higher rates are being charged on larger loans. On average, students borrowed $11,337 in the past year alone (up 21% from the previous year), while parents borrowed $13,507 (up 25%).¹

College debt rising 3.5x faster than college costs

It’s no secret that college debt has been spiraling out of control in recent decades. What’s often missing from news reports is the troubling fact that loan balances have been rising at a much faster pace than college costs.

Since 2005, for example, college costs nearly doubled while student loan debt more than quadrupled, from $360 billion to $1.6 trillion. These numbers suggest college savings are lagging behind rising costs, forcing families to borrow more to make up the difference.

A heavy burden on college graduates

Making monthly student loan payments shortly after college can negatively affect a graduate’s ability to meet living expenses, build an emergency fund or open a (401)k at work. Missed or late loan payments can damage credit scores, lead to loan defaults and cause other money woes. In fact, 85% of college borrowers expect to experience financial hardships due to their debt.³

There’s often a high personal price to pay as well. Many college graduates with loans put off buying a house, getting married or starting a family. Once they do have kids, it can be difficult to save for their education, increasing the risk that the next generation will also be saddled with unmanageable debt.

What about student loan forgiveness?

After the Supreme Court rejected their initial proposal for widespread student loan forgiveness, the Biden administration introduced a new option known as the SAVE Plan. However, most borrowers wouldn’t qualify for loan forgiveness until after 10 or more years of payments. Most recently, a federal court has blocked the plan from taking effect, and more legal battles are expected.

How much college debt is too much?

One rule of thumb is that total college debt should not exceed a graduate’s first-year starting salary. Depending on the field of study and type of school, this guideline can leave a large college funding gap to be filled with investments, scholarships and other sources.

Action plan: Strategies for increasing college savings and ditching college debt

• Consult a financial professional to establish your college debt threshold and a plan for paying the rest of the expenses.
• Invest in a tax-advantaged 529 plan that allows you to keep more for college. Every dollar saved in taxes is one less you have to borrow.
• Move cash and taxable investments into your 529 account to increase after-tax return potential. Today, $1.5 trillion of college savings is held outside 529 plans.⁴
• Make college savings a monthly habit. You can arrange automatic transfers from a bank account to your 529 plan, so you never miss a contribution.
• Give your college savings a boost as you pay off expenses, earn raises, and receive bonuses, tax refunds or inheritances.
• Don’t go it alone. Grandparents, aunts, uncles and anyone else can make gift contributions to your 529 account or open their own.