Student-loan interest rates set to reach Great Recession highs

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(Bloomberg) — Anyone who needs to borrow from the US government to cover college tuition this fall will likely face the highest borrowing costs for student loans in more than 15 years.

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That’s because interest rates on federal student debt are determined each academic year by a formula taking the yield from May’s US Treasury 10-year note auction and adding 2.05%. Yields have soared in recent weeks as Federal Reserve officials reconsidered the timing of their first interest-rate cut in light of the lack of progress on inflation.

Based on the April auction, loans taken out by undergraduates for the 2024-2025 school year would have a rate of 6.61%, the highest since 2008 and up from 5.5% this year. Yields have risen further this month, and there’s a chance they could even be higher when the Treasury Department holds the May auction.

Read More: Fed Resets Clock on Cuts and Questions If Rates Are High Enough

The interest rate on federal student loans are set by federal law — not the US Department of Education. Still, the likely uptick in interest rates may weigh on voter sentiment and is potentially bad news for President Joe Biden’s re-election bid as college-bound students and their parents tend to blame the incumbent administration for high rates.

As Fed policymakers pushed out rate cut expectations, sectors of the economy that are most sensitive to rates have already seen an impact — including housing, as mortgage rates climbed back above 7%.

Interest on government student loans for undergraduates is capped at 8.25%. The high cost of college and mounting loan debt have decreased undergraduate enrollment in recent years. According to a 2023 survey, just 42% of Americans think the cost of college is worth it, compared with 53% a decade earlier.

Read More: Ivy League College Costs Soar to More Than $90,000 a Year