The Rising Interest Rates on Federal Student Loans

The recent announcement by the U.S. Department of Education regarding the interest rates on federal student loans has left many parents feeling uneasy. Specifically, the news of a 9.08% interest rate on Direct PLUS loans for parents for the upcoming 2024-2025 academic year came as a shock to many. This rate, according to higher education expert Mark Kantrowitz, is the highest it has been in over three decades. This increase is significant, especially when compared to the current rate of 8.05%. The last time rates for parent loans were at a similar level was back in 1991-92, when the rate stood at 9.34%. During that time, student loan rates were variable, and parent borrowers resorted to taking out SLS loans, which were similar to PLUS loans.

As college costs continue to rise, more parents are finding themselves taking on student loans to support their children’s education. Data from the 2019-2020 academic year shows that the average parent PLUS borrower had a balance of over $40,000 when their child graduated. This is a significant increase from around $26,000 in 2010-2011, adjusted for inflation. Kantrowitz warns that parents often borrow more than they can realistically afford to repay. He suggests that parents should not borrow more in student loans than their annual income, taking into account all their children’s expenses. By adhering to this guideline, they should be able to repay the loan within a decade.

While Kantrowitz’s recommendation provides a general guideline, he acknowledges that each family’s financial situation is unique. For parents who plan to retire within the next ten years, borrowing less is advisable to avoid having a student loan repayment burden during retirement. Additionally, parents who are still paying off their own student loans should exercise caution before taking on additional debt. Overborrowing can lead to financial strain and long-term consequences for parents. Kantrowitz suggests exploring alternative options, such as enrolling in a less expensive college, seeking student employment, and applying for scholarships.

For parents who do opt to take out PLUS loans, experts advise against deferring loan payments while their child is in school. Betsy Mayotte, president of The Institute of Student Loan Advisors, highlights that while deferring payments is an option, it can result in increased total interest accruing on the loan. The key is to manage loan payments responsibly to avoid accumulating excessive interest charges. Planning ahead and considering the long-term financial implications of borrowing can help parents make informed decisions regarding student loans for their children’s education.

The rising interest rates on federal student loans, particularly for parent borrowers, underscore the importance of careful financial planning and responsible borrowing practices. Parents must evaluate their financial capabilities and consider all available options before taking on student loan debt. By understanding the implications of borrowing and making informed decisions, parents can navigate the complexities of financing their children’s education without sacrificing their own financial well-being.