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Student loan rates set to hit 16-year high: ‘It’s a shock’

The cost of borrowing student loans is on track to hit a 16-year high.

The interest rate on a federal undergraduate student loan is expected to rise to 6.5% in July, which would mark its highest level since 2008, financial aid expert Mark Kantrowitz told ABC News. The current interest rate for a new student loan is 5.5%.

The student loan borrowing rate is set by adding a fixed amount of 2.05 percentage points to the yield on 10-year Treasury notes, which is determined each year at an auction in May. In Wednesday’s auction, the 10-year Treasury note was sold at a yield of 4.48%.

The yield on 10-year Treasury bonds, meanwhile, closely tracks the benchmark interest rate set by the Federal Reserve. That benchmark rate has remained relatively low for years but has risen since 2022, when the Fed undertook an aggressive series of interest rate hikes to combat inflation. In response to rising interest rates, student loan rates have skyrocketed.

“It’s a shock because people had gotten used to low rates,” Kantrowitz said.

Since student loans are generally fixed, the upcoming rate will apply to new loans but will not affect previous ones. The new rate will apply to loans for the 2024-2025 academic year beginning July 1.

On a 10-year $28,000 student loan at the future rate, the borrower will pay about $10,000 in interest, which is about a 35% higher cost to the borrower compared to a student forgiving its loans, Nancy Goodman, founder and CEO. of College Money Matters, a higher education nonprofit, told ABC News.

Under the future rate, such a borrower would pay $2,000 more over the course of the loan compared to the current rate, Goodman said.

“It’s a big burden,” Goodman added. “I hate to see this for the students.”

In December, the Fed forecast interest rate cuts of three-quarters of a point over the course of 2024. However, in part because of stubborn inflation since then, the Fed has recently sowed doubt about whether reality of these rate cuts.

At a meeting earlier this month, the Fed kept interest rates at their highest level since 2001.

Because the interest rate on student loans depends on the yield on 10-year Treasury notes set at an auction in May, the delay in interest rate cuts has locked in high borrowing costs for students for the next academic year.

“Student loans have been hampered by the Fed’s attempt to curb inflation, and students who borrow are going to pay the price,” Goodman said.

Average annual tuition for a public four-year college in the state was $11,260 for the most recent academic year, representing a 2.5% increase before adjusting for inflation, according to the College Board.

For a private four-year college, average annual tuition was $41,540 in the most recent academic year, which represented a 4% increase before adjusting for inflation, according to the College Board.

Rising borrowing rates will exacerbate rising tuition costs, especially for low- and middle-income students, Kantrowitz said.

“College is getting less and less affordable every year,” Kantrowitz added.

Meanwhile, the rate of students applying for federal loans has fallen.

During the current academic year, about 35% of students completed the Free Application for Federal Student Aid, or FAFSA, according to data from the National College Attainment Network. This share of students completing FAFSA forms marks a 13 percentage point decline from the previous academic year, the National College Attainment Network found.

The drop in aid applications suggests many students are looking for low-cost options or choosing not to go to college altogether, Goodman said.

“Colleges should be a little concerned,” Goodman said. “Students are increasingly aware of the cost of borrowing and colleges are finding it increasingly difficult to fill their classes.”

“It’s difficult for everyone,” Goodman added.