The interest rates for federal student loans for the coming academic year are set based on the May 10-year Treasury notes auction. That auction took place on May 11, and we now know the interest rates for student loans in the 2022-2023 academic year.
2022-2023 New federal student loan interest rates
Based on the recent 10-year Treasury auction, we will see the following rates for the 2022-2023 year:
|Undergraduate Borrowers||Graduate or Professional Borrowers||Parents and Graduate or Professional Students|
|Direct Subsidized Loans and Direct Unsubsidized Loans||Direct Unsubsidized Loans||Direct PLUS Loans|
All interest rates shown the chart above are for loans first disbursed on or after July 1, 2022, and through June 30, 2023. These are fixed rates that will not change for the life of the loan.
How federal student loan rates are set
Federal student loan interest rates are set for each coming school year based on the May 10-year Treasury auction, plus an add-on interest rate. Given that the May 2022 10-year Treasury yield was 2.943%, we get the rates listed above. The 10-year Treasury yield from last year was 1.68%
The Department of Education uses the following formulas:
- Direct Loans for Undergraduate Borrowers: 10-year Treasury yield plus 2.05%
- Direct Loans for Graduate or Professional Borrowers: 10-year Treasury yield plus 3.60%
- Direct PLUS loans: 10-year Treasury yield plus 4.60%
Highest since pre-COVID
The Federal Student Loan Rates for AY22/23 are 1.263% higher than the current AY21/22, making them the highest they’ve been since before the COVID epidemic in AY18/19.
|Loan Type||Undergraduate Borrowers||Graduate or Professional Borrowers||Parents and Graduate or Professional Students|
Fees for federal student loans
Federal Student Loans also charge fees that are a percentage of the total loan amount. Similar to the fixed interest rate, these depend on the loan type and are set annually. The fee is deducted from each loan disbursement you receive while enrolled in school.
For example, a 4.228% fee means if you want your school to receive $10,000 in disbursement, you need to “effectively” borrow $10,441.5 (=$10,000/(1-4.228%)) in principal for that student loan to cover the fee, so that your school will receive $10,000. Or if you borrow for $10,000 in principal, your school will then only receive $9,577.2 (=$10,000*(1-4.228%)) actual disbursement.
What is APR?
The interest rate is the cost of borrowing money. Each month the accrued interest will be added to the principal due in your monthly payment until you pay the principal back in full.
The APR includes any origination fee or other costs that may be added when signing your loan agreement in addition to the interest rate. For a mortgage lender these are commonly called closing costs when taking on a home loan. With the Truth in Lending Act, lenders are required to disclose the APR before you sign a loan or take on a credit obligation. Typically fees mean your APR will be higher than the interest rate offer.
How to calculate APR
Now that we have the fees for each loan type, the next step to finding the APR is to estimate the monthly payment amount. Rather than breaking out the calculator or pen and paper, open excel or google sheets and type the following formula:
- rate is the interest rate divided by 12 (to get the monthly instead of annual rate)
- nper is the number of payment periods, or months, you will make payments on the loan to repay it
- pv is the present value, or principal, of the loan (including any fees charged upfront)
Now you can use that payment figure to calculate the APR in excel using the following:
- nper is the same number of payment periods you used before
- pmt is sht monthly payment figure you calculated above
- pv is the principal amount (this time without including any fees charged upfront)
What a difference fees can make
While the interest rate can give you a good idea of how much your monthly payments will be, they aren’t the whole picture. Calculating your APR based on your estimated repayment timeline is critical to know the cost of borrowing from a lender, whether it is a federal or private student loan.
By Scarlett Li