Federal student loan rates hit high levels not seen in years as many go back to college

Back-to-college involves far more than scrolling online to shop for dorm-ready decor. It's also triggers yet another reminder that it's time to get back to borrowing — and, yes, sticker shock.

The fixed interest rate on federal student loans will climb to 6.53% for undergraduate loans — up from 5.5% last year. The new higher rate applies to Federal Direct Stafford loans for undergraduates issued from July 1 through June 30, 2025.

College students and their parents are now looking at steep federal student loan rates not seen in years. You'd have to go back to June 2013 and earlier when the rate was 6.8%, for example, to find a federal fixed rate loan for undergrads that's higher than the current rate.

How does that compare with a new, five-year car loan rate? The average new car loan rate is 7.9%, according to Bankrate.com data. The average was 7.18% a year ago and 4% on March 16, 2022, just before the Federal Reserve started hiking short-term interest rates.

What college loan is hitting above 9% now?

Direct PLUS college loans jumped to 9.08% — up from 8.05% last year. Direct PLUS loans often are taken out by parents to bridge the gap and pay for expenses not covered by other financial aid and federal student loans. And PLUS loans also can be taken out by graduate or professional students.

Direct unsubsidized loans for students in graduate or professional programs hit 8.08% — up from 7.05% last year.

The good news, if you graduated recently, is that lower rates that were locked into place a few years ago remain in place for borrowers. A fixed rate as low as 2.75% was in place for undergraduate federal loans during the pandemic from July 1, 2020, through June 30, 2021.

What's the best way to borrow?

In general, most college loan experts will recommend that students do their best to keep searching for scholarships, raising extra cash by working in the summer and doing all they can to keep a lid on spending. Do your best to keep a lid on student loan borrowing.

After that, students should opt to take out federal student loans first. The maximum in federal direct loans allowed for dependent undergraduate students is $5,500 for freshmen — and no more than $3,500 of that amount can involve subsidized loans, according to the U.S. Department of Education.

"Federal student loans are better than private student loans because they are cheaper, more available and have better repayment terms," according to college financial aid expert Mark Kantrowitz.

For parents, the trick may be figuring out if you can get a better rate on a private loan than the current 9.08% on a Direct PLUS loan. Shopping around for a private student loan, instead of a Direct PLUS loan, might be a good strategy if you have excellent credit.

And remember, not everyone qualifies for a PLUS loan. A credit check is required. As a result, the Department of Education notes that you'd need to lift or remove any security freeze that you might have placed on your credit file at each credit bureau before you apply for a PLUS loan.

If you have what the Department of Education defines as an "adverse credit history," you might not qualify if you don't meet other requirements. An adverse history includes a long list of transgressions, including any repossession or foreclosure in the past five years. An adverse history also includes "accounts with a total outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report."

It's key to know that rates for Parent PLUS loans are not risk-based pricing, meaning you don't pay a higher rate if you qualify but don't have excellent credit. Everyone who qualifies for a Parent PLUS loan will pay a fixed rate of 9.08% for PLUS Loans taken out from July 1 through June 30, 2025.

Each year, Kantrowitz said, 7.4% of parents of students in bachelor's degree programs borrow Parent PLUS loans. Among students who graduate, he said, 13.1% of their parents borrowed Parent PLUS loans at least once during the student's undergraduate education.

What are the rates on private student loans?

If a borrower has excellent credit, though, private loans can be even better in some cases than PLUS loans taken out by parents. Some private student loan rates currently start in the 4.25% to 5% range for fixed rates, but again those super low rates can be snagged only by borrowers with excellent credit scores. Someone with weak credit could be looking at private student loan rates now that can hit 15% to 18%.

A student could qualify for a lower interest rate by apply with a creditworthy co-signer who has excellent credit, Kantrowitz said.

No prepayment penalties exist on student loans, Kantrowitz said. So if interest rates drop, you can refinance your student loans into a new private refi with a lower interest rate.

Hanneh Bareham, an analyst for Bankrate.com, said average private student loan rates are generally high when compared with rates in previous years.

Private student loan lenders offer a variety of rates and base the interest rate on the creditworthiness of the borrower. While every lender is different, Bareham said, it’s generally safe to say that in today’s high-rate economy, an applicant would need to have an excellent credit score — such as a FICO score of 800 or higher — to qualify for the lender’s lowest ranges for student loan rates.

Is there a tax break on student loan interest?

Another key tip: Take time to check and see whether you qualify to claim the student loan interest deduction on your federal income tax return. The above-the-line deduction will exclude up to $2,500 that you paid in a given year in interest on federal and private student loans. You can save hundreds of dollars on your income taxes.

Student loan interest is reported on a Form 1098-E: Student Loan Interest Statement.

But pay extra close attention to the rules. Tax professionals see many individuals make mistakes with student loan interest and the tax deduction, according to Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

"Sometimes, the person who gets the tax deduction does not even take it and others may take it who should not," Steber said.

The student loan interest deduction, for example, is not available when filing as married filing separately.

In addition, the student cannot claim the student loan tax deduction if he or she is listed as a dependent on someone else's tax return.

And a parent cannot claim the student loan interest deduction if the parent isn't legally obligated to pay interest on that particular student loan. That's true for parents, even if the student is claimed as a dependent on the parent's return.

The tax break can be an option if you take the standard deduction or itemize deductions. But your income does matter.

On 2024 returns, the amount of your student loan interest deduction will be gradually reduced if your modified adjusted gross income was between $80,000 and $95,000 if single or $165,000 and $195,000 if you file a joint return. You couldn't claim the deduction if your MAGI is $95,000 or more — or $195,000 or more if you file a joint return.

The deduction for education loan interest — which applies to all loans, not just federal student loans, that are used to pay for higher education expenses —has various rules that apply, too. Such as: The deduction cannot be claimed for student loan interest that is paid by an employer when the payment is excluded from the employee’s income.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X  @tompor.