Federal student loan rates are going up — but they’re still your best option

·5 min read
Person sitting on a couch writing in a notebook in front of a laptop
Person sitting on a couch writing in a notebook in front of a laptop

At a time when all Americans are searching for ways to beat inflation costs and cut back on spending, it will be tempting for young people to look for the lowest borrowing rates when it comes to student loans.

And it makes sense! As of this writing, the Federal Reserve has raised interest rates four times in 2022, with more rate hikes likely. (There’s also some loan forgiveness in the mix, which is one positive addition.)

Increased interest rates means it’s more expensive to borrow money, which is exactly how a student loan works — you’re borrowing from the federal government. For the 2022-23 school year, interest rates on student loans will increase to 4.99% for undergraduate students, up from 3.73% the year before. Student loan interest rates are directly tied to the high yield on a 10-year treasury note, which fluctuates as the Federal Reserve raises (or lowers) interest rates.

So as rates increase, potential borrowers may wonder if private loans  — which often boast lower interest rates — are now a better option.

It’s a legitimate question, but interest rates aren’t the only consideration when choosing a student loan provider. Here are some other things you should remember when deciding what kind of loan to use, even if you’re worried about increased costs in the short term.

More repayment options

Borrowers with federal student loans can access various repayment options, including income-driven repayment plans. IDR plans calculate your monthly payment as a percentage of your income. If you're working part-time or are unemployed, your monthly payment may be as low as zero.

Conversely, private student loans do not offer income-driven repayment plans, so there is much less flexibility for borrowers struggling to afford their payments. If you can’t afford your monthly payment with a private lender, your only option may be to refinance with a longer term.

More forgiving terms

Federal student loans have longer deferment and forbearance periods than private ones. Borrowers can apply for a year-long deferment or forbearance for up to three years. You won’t have to make any payments during that time. And borrowers with Direct Subsidized Loans will accrue no interest during their deferment periods.

Forbearance periods for private student loans depend on the lender, but they are often shorter than federal loans. Some private lenders only offer three months max of forbearance. Also, you’ll always be on the hook for any interest that accrues during a private loan forbearance period.

When the Covid-19 pandemic shut the world down in March 2020, the federal government instantly suspended student loan repayments with 0% interest. That means it’s been more than 2.5 years since federal borrowers have had to make payments on their loans. Plus, if you were working toward Public Service Loan Forgiveness (PSLF), you still received credit during those years of nonpayment.

While some private student loan companies offered special forbearance programs during the Covid-19 pandemic, none matched the 0% interest rate the federal government granted.

Loan forgiveness plans

Federal student loans are eligible for several types of loan forgiveness programs. The PSLF program is the most popular. This option requires that borrowers work for a qualifying employer while making payments under an IDR plan.

After 120 monthly payments, the remaining loan balance will be forgiven tax-free. Teachers, social workers, medical professionals and more may qualify for PSLF.

Income-driven repayment plans are also eligible for loan forgiveness. After making IDR payments for 20 or 25 years, the remaining balance is forgiven.

Private student loans rarely offer loan forgiveness opportunities. Some career-specific loan repayment programs may be available for both federal and private student loans, but these often carry specific requirements — like working in a rural or underserved community — for a certain number of years.

So … are private loans ever the right choice?

Not every student will qualify for a federal student loan. For example, international and DACA students are ineligible for federal loans. Some private student loan providers do accept those students, making it a reasonable option.

If your main priority is finding the lowest interest rate possible, then a private student loan may be a better option. However, it’s hard to qualify for the lowest interest rates advertised by private lenders. The best way to do that is to add a cosigner with excellent credit and a steady source of income.

Many lenders offer pre-qualification, allowing you to see what kind of interest rates you're eligible for without submitting a full application. Once you’re prequalified, you can start comparing interest rates.

There are also other factors to consider beyond the interest rate. First, compare the grace period, which is the length of time you have after graduating or leaving school to begin repayment. Federal student loans have a six-month grace period, and most private lenders also offer six months. There are a handful of lenders — Earnest is one example — that offer a nine-month grace period, so you have three extra months to start making payments.

Next, look at any other unique perks and benefits. For example, Discover does not charge late fees, which makes it less costly to miss a payment. Earnest lets you skip one payment each year for free. SoFi offers free career coaching if you lose your job and need help finding a new gig. Choose a private lender offering the greatest number of benefits you think you’ll need.

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