A graphic of 3 columns, the last with a mortarboard.

As interest rates rise, it’s no surprise that loan rates are also climbing for college students (and their parents) taking out federal student loans for the 2018-2019 academic year.

Interest rates on federal student loans were reset on July 1. It’s the second year in a row that rates have risen, and the increases are fairly steep for the 2018-2019 academic year:

• Undergraduate loan rates will be 5.05 percent, up from 4.45 percent for 2017-2018.
• Parent PLUS loans will be 7.60 percent fixed, up from 7 percent.
• Graduate school loans will be 6.60 percent, up from 6 percent.

Under these higher rates, undergraduates who take out $30,000 in student loans—about average for students who earn a four-year degree—on the standard 10-year repayment plan would rack up $8,300 in interest charges. That’s $2,240 more than if they’d been able to take out all their loans at the 3.76 percent rate in effect for the fall of 2016, according to analysis by the online consumer finance marketplace Credible.com.  

More on Paying for College

Federal student loan rates are fixed, so they won’t go any higher over the life of the loan and apply only to new loans, not what you have already borrowed. But a large group of people will feel the pain of paying more. As college costs have risen, so has the number of people relying on loans to pay for school. About 60 percent of students say they had to borrow money to cover the cost of college.

The amount of debt parents are taking on to help their children pay for school is rising even faster than for students themselves. Americans age 60 and older are the fastest-growing group of student loan borrowers, primarily because they are taking out loans to help children and grandchildren, according to the Consumer Financial Protection Bureau. Of these borrowers, the amount of debt they have taken on has nearly doubled, from $12,000 to $23,500 in the last decade.

Yet many students and their parents who borrow have little understanding about how their loans work or how higher rates could affect them.

Only about half of students and parents know that they aren't guaranteed to get the same rate on federal loans each year they borrow, according to a Credible.com student loan quiz. And only 14 percent of parents and students know that Parent PLUS loans have higher rates than undergraduate or graduate loans.

“These rate increases are likely to catch many families by surprise, because they're taking loans out a semester or a year at a time, and don't start repaying them until after they leave school,” says Credible founder and CEO, Stephen Dash. 

Loan Fees Will Be Lower, Grants Bigger

There is some good news for borrowers: Origination fees charged by lenders for processing loans are going down. For loans issued Oct. 1, 2018, through Sept. 30, 2019, fees will be 1.062 percent of the principal loan amount, down from 1.066 percent, and 4.248 percent for PLUS loans, down from 4.264 percent.

July 1 is also when changes to federal grants—money students don’t have to pay back—are made. The maximum Pell Grant will be $6,095, up from $5,920. Pell Grants help 7.5 million low- and moderate-income students pay for college and reduce how much they need to borrow.

Even with the increase, Pell Grants cover only a fraction of college expenses. The new maximum Pell Grant for 2018-19 will cover less than 30 percent of the cost of attending a public four-year college, the smallest share in over 40 years, according to The Institute for College Access & Success.

The fact that they are costlier doesn’t mean you should avoid taking out federal loans. If you have to borrow, federally backed loans are still the best way to do so because they have many consumer protections compared with private loans. But higher rates mean you need to be even more cautious about the amount you borrow.

What You Should Know About Borrowing

Don’t borrow more than you can afford. A good rule of thumb is to limit your borrowing to no more than you expect to earn annually in the early years of your career. That can help you limit your monthly payments to no more than roughly 10 to 15 percent of your expected gross income. If more than 15 percent of your earnings goes to student loan payments, you’ll struggle to pay and need to cut spending in other areas of your life.

Of course, it can be hard to know what your future earnings will be or what career you will end up in. If you're really unsure, be even more conservative in your borrowing. Look for other ways to lower costs, say, by finding cheaper housing or choosing a less-expensive meal plan.

Be wary of private loans.  A private loan rate is typically variable, which means it is likely to rise over time, so you end up owing a lot more in interest. Federal loans have fixed rates and the option of flexible repayment programs. That includes income-based repayment (which can make your loan payments more affordable), deferment if you return to school, or loan forgiveness options if you meet certain conditions. Unlike private loans, students don’t need a co-signer or credit history to get a federal loan. For parents, taking out federal student loans is also less risky than using home equity or tapping retirement savings to help your kids pay for college.

Keep good records. Once you move into repayment mode, be sure you know what kind of loans you have and which company is servicing them. You will also need to keep records of what you owe and the payments you’ve made. Save copies of important documents on a flash drive or in paper form. If you have federal loans, you can find the name and contact info for your servicer in this national database. If you have a private student loan, check your credit report to see which firm is listed as a servicer. You can get a free copy of your annual credit report at annualcreditreport.com