Getting ready to take out loans to help pay for college this year? You may want to reconsider — it’s about to get more expensive to do so.
New interest rates for federal student loans go into effect July 1.
The Department of Education adjusts the interest rates annually. While the rate increases outlined below may seem minuscule, they may add a significant amount to what a borrower will pay over the life of the loan.
The rate on loans you’ve already taken out will not change, but if you plan to take out loans in the coming academic year or beyond, you may want to re-evaluate how much you plan to borrow.
Here are the New Federal Student Loan Interest Rates
The interest rate for undergraduate direct subsidized loans and direct unsubsidized loans, which are often referred to as Stafford loans, will increase from 3.76% to 4.45%.
Direct subsidized loans don’t accrue interest while you’re in school, during your grace period or if you defer. Direct unsubsidized loans accrue interest as soon as they are disbursed.
The typical rule of thumb is to borrow the maximum in subsidized loans before turning to unsubsidized federal loans.
Graduate direct unsubsidized loan rates will increase from 5.31% to 6%.
Direct PLUS loan rates will increase from 6.31% to 7%. These loans are meant to fill financial aid gaps. If you’re an undergraduate student, only your parents can take out PLUS loans.
The fixed interest rate for federal Perkins loans remains at 5%.
Federal student loans also come with a one-time fee, which is deducted from the disbursement you receive.
For direct subsidized and unsubsidized loans, that fee is 1.069%. For direct PLUS loans, that fee is a whopping 4.276% of what you borrowed. The fee that’s taken from your disbursement is not waived from your final repayment of the loan.
Student loan interest rates have fluctuated in the years since the recession, when interest rates in the 7-8% range were the norm. Because the first day you can borrow for the 2017-18 academic year is July 1, there’s no way you can borrow before this change takes effect.
How to Deal With the New Interest Rates (Before You Graduate)
Now may be a good time to get in touch with your school’s financial aid department, which can help you evaluate the loans you’ve been offered and calculate the potential interest you’ll eventually pay. Requesting a phone appointment before you get to campus this fall can help you avoid long lines of students who need help with emergent issues.
Want to avoid taking out loans? Explore opportunities for grants and scholarships that won’t have repayment obligations. If you’ve been putting loan funds toward your monthly expenses, like rent or groceries, you may want to check out federal work-study opportunities on campus.
One last tip: If you can afford it, start paying down the interest on the unsubsidized loans you’ve already taken out. Even if it’ll be years before you owe monthly payments on those loans, you can log into your loan servicer’s website and designate a payment to go solely toward your interest as it accrues.
It won’t feel like you’re making real progress on your loan repayment, but you’ll save a lot of money in the long run.
Lisa Rowan is a writer and producer at The Penny Hoarder. She’s no stranger to 8% student loan interest rates.
This was originally published on The Penny Hoarder, one of the largest personal finance websites. We help millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. In 2016, Inc. 500 ranked The Penny Hoarder as the No. 1 fastest-growing private media company in the U.S.
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