KEY TAKEAWAYS
- As families gear up for students to start a new school year, many are considering how to pay for college tuition.
- Almost half of families will borrow money to cover a member’s college tuition, and a majority of those will get a federal student loan.
- Despite being at a 16-year high, interest rates on federal student loans are still far lower than borrowing costs on the private alternative.
As families prepare for their children to go back to college, many are considering ways to afford tuition.
The majority of families report planning on paying the tuition outright, according to a new survey from student loan provider College Ave. However, 45% of families will borrow money to pay for tuition. Of those borrowing, the majority report utilizing federal student loans.
With high interest rates unlikely to ease before the semester starts, borrowers will be facing decisions on how much to take out and what loans are right for them.
Highest Student Loan Interest Rates Since 2008
Those taking out federal student loans face the highest interest rates in 16 years. The loans disbursed by the Department of Education this year will have a fixed interest rate of 6.53% for students and 9.08% for parents.
Rising yields on 10-year Treasurys have pushed up the department’s interest rates as investors remain concerned about whether or not the Federal Reserve will cut its benchmark interest rate.
Federal Loans Cheaper Than Alternatives
However, those rates are still far lower than that of private student loans.
According to research by Investopedia, the average variable rate on private student loans is 10.43%, and fixed loans cost even more at 11.11%.
Some families that need to borrow more money than the federal loan limits, need additional funds for costs outside tuition, or that don’t meet the government’s criteria for income look to private student loans.