News about student loans is never far from the media, especially during this current president’s tenure. The fact that it is nearly impossible to get higher education without incurring that debt is one reason many talented Americans decide not to further their studies. 

It has gotten worse as people who would have had the effrontery to attempt the undertaking are now too scared because interest on the loan is at its highest in almost two decades. 

There are many complaints about the current interest rate on a new student loan, which is still at 5.5%. That will change later in July, as the loan interest rate will rise to a hefty 6.5%. Should this happen, it will be the highest interest rate the country has seen since 2008, a shock for all who were used to the previous low rates. 

Student loans are usually fixed, meaning only people taking new loans will have to deal with the latest interest rate. The new rate becomes effective on July 1, becoming an even bigger burden for new loan applicants. 

Not many people like the idea of higher interest rates on student loans, as they could become a big burden for those involved. A student who borrows a 10-year loan of $28,000 with this new rate will have to pay about half that whole price, about $10,000, to settle interest. When a student compares the cost and time it will take to pay back, forgetting that dream to secure a higher education becomes the more reasonable choice. 

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One major reason is the influence of the Federal Reserve. Student loan rates are set by adding a fixed amount of 2.05 percentage points to the yield on the 10-year Treasury bond, which is determined each May at an auction.

This year, Treasury bonds were sold at a 4.48% yield, affecting the benchmark interest rate set by the Federal Reserve. The rate has always been low, but it started rising dramatically in 2022 as the government tried to fight inflation by aggressively increasing interest rate hikes. 

Inflation is a cancer that eats away at everything. When the feds tried to end it, they failed, and now, new students looking to borrow loans are the ones paying for it. In December, the Federal Reserve predicted three quarter-point interest rate cuts throughout 2024. That has not happened and may likely not because inflation has not let up, leading many to believe those cuts won’t happen. 

By the time the annual auction of the 10-year Treasury bonds was held in May, the Fed’s interest rates were the highest they’d been since 2001. The student loan interest rate depends on yield from the 10-year Treasury bonds, and the delay of the predicted rate cuts has affected students’ borrowing costs for the next academic year.

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It is becoming increasingly difficult for average American families to send their kids to college as fees continue to climb yearly, and the astronomical interest rates deter potential student loan applicants. Anybody looking for a four-year course at an in-state public college is looking at  $11,260 in tuition. This already led to a 2.5% increase before adjustments were made because of inflation.

The cost of studying at a public institution may seem huge, but a four-year study at a private institution costs more. In private institutions, students paid $41,540 for annual tuition over the 2023-2024 academic year. That is a 4% increase before it was adjusted for inflation. This spells doom for college enrolment rates, with public colleges feeling the brunt. 

Thanks to high interest rates, students have lost their desire to apply for federal loans. In the 2023-2024 academic year, about 35% of college students finished the Free Application for Federal Student Aid (FAFSA), a decline of 13 percentage points compared to the previous academic year (2022-2023). 

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Fewer people are applying for college, which suggests that they are either choosing more affordable alternatives or forgoing higher education altogether. If this trend continues, colleges will have problems filling their classes, which means fewer people studying important disciplines, eventually affecting the labor market. 

Despite the currently high interest rates, some still have an interest in securing higher education; however, after it increases in July, many will be discouraged as it seems like a financial handicap. Finishing college just to become enslaved to paying back is a grim outlook for anyone just finishing college, and many who took out such loans in the past have admitted to postponing important life events due to what their finances looked like.

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