Taking out new student loans just got more expensive

Graduate Jarameel Perez hangs out the door of his car while listening to Muhlenberg High School's drive-in graduation ceremony Thursday morning.
President Biden recently said a decision on student-debt relief will be made in the coming weeks. Press Secretary Jen Psaki said it will be targeted to borrowers making under $125,000 a year.Getty Images
  • The Treasury just announced interest rate hikes on federal student loans starting in July.

  • The rates apply to new federal direct loans that undergraduates, graduates, and parents take out in July or later.

  • Federal student-loan borrowers are waiting to hear if Biden will enact broad relief.

If you're planning to take out student loans in July, get ready to pay more interest.

On Wednesday, the Treasury Department announced new interest rates for federal student loans that will go into effect starting July 1, 2022. This is part of the Treasury's efforts to fight inflation, and it comes after the Federal Reserve hiked rates last week to a range of 0.75% to 1%, the first double-sized rate hike since 2000.


For student-loan borrowers, the hike means that if borrowers are paying off loans taken out prior to this July, the old interest rates will apply, but for any new loans, the higher rate will go into effect.

Here are the new interest rates for the three types of federal student loans:

  • Direct subsidized and unsubsidized loans for undergraduates: 4.99%, up from 3.73%

  • Direct unsubsidized loans for graduates and professionals: 6.54%, up from 5.28%

  • And Direct PLUS loans for parents and graduate or professional students: 7.54%, up from 6.28%.

While these hikes are unrelated to any policies surrounding student-loan relief, it comes as millions of federal borrowers are waiting to hear if Biden will enact broad debt forgiveness. Biden recently said a decision on relief will be made in the coming weeks, and Press Secretary Jen Psaki confirmed to reporters that while an amount of relief has yet to be decided, it will be targeted to borrowers making under $125,000 a year.

While many Republican lawmakers have criticized student-loan forgiveness, arguing that debt should be paid off, many student-loan borrowers have paid off the debt they borrowed, but are still burdened with monthly payments because of accumulating interest. Insider has spoken to dozens of borrowers whose current balance is significantly more than what they originally borrowed, keeping them in a cycle of repayment.

Reid Clark, for example, took out PLUS loans — the most expensive type of federal loan — to send his five kids to college, and he partially blames the high interest rates that have kept him trapped in debt.

"I am highly concerned about my ability to pay back the loans during my remaining working years, and it's going to scare me even more in a few years when I retire and I go on to a very limited income," Clark previously told Insider.

Some lawmakers have urged Biden to act on spiraling student-loan interest. In December, 14 Democratic senators, including Georgia Sen. Raphael Warnock, requested that Biden continue to waive interest on student loans even after he resumes payments (federal student-loan payments have been paused, with 0% interest, for the duration of the pandemic).

"Accumulating student loan interest can be a daunting challenge for borrowers with the lowest incomes or the heaviest student debt burdens," the lawmakers wrote.

For now, student-loan payments are set to resume after August 31, and federal borrowers are waiting to learn what relief they might get before then.

Read the original article on Business Insider