Planning to take out a federal student loan this fall? Prepare for a higher interest rate

Students planning to borrow federal student loans for the upcoming school year, take note: Interest rates for new ones will tick up a percentage point come July 1, to more than 3.7% for undergraduates. This change comes as interest rates on existing federal student loans are set at zero percent through the end of September as part of coronavirus relief. 

While the new rates are still close to historic lows, rates reset at the start of July every year according to a formula in federal law based on the high yield of the last 10-Year Treasury note auction in May, plus a margin depending on the type of loan. That means federal student loan interest rates will increase for all new loans distributed between July of this year through June 2022 — including those taken out for the fall semester. "There is no discretion in the setting of those rates. To change the formula, Congress would have to pass legislation, which is unlikely to occur," said student loan expert Mark Kantrowitz.