Private Student Loans Have Gotten 2x More Expensive Since 2021

The steady rise in interest rates since early 2022 has claimed numerous casualties. Americans are buying fewer homes and funding fewer startups. The stock market has been wobbly, and the rise in interest rates played a crucial role in the collapse of Silicon Valley Bank earlier this Spring.

Higher ed may appear less impacted on the surface. But a small yet critical cohort of students and families has been heavily affected – students and parents who take out private student loans. Private student loans are a small piece of the overall student loan puzzle, representing roughly 8% of outstanding student debt (~$146.9 billion) according to a March 2023 analysis from Federal Student Aid.

While the overall balance is much smaller than that of federal loans, private loans play a crucial role in the finances of many colleges and universities. About 88% of private loans are taken out by undergraduate borrowers. Federal loans have much lower interest rates but are capped at $27,000 over four years (~$6,700 per year). This borrowing cap falls well short of the nearly $30,000 average net cost of a private four-year degree ($15,000 at public institutions), causing many undergraduate families to turn to private loans to cover the gap.

Meanwhile from an institutional perspective, tuition paid from private loans shows up on their books as a lump sum cash payment, which is critical for managing finances. Private borrowers are a small percentage of all students but represent a much larger proportion of the crucial full-pay and high-partial pay segments.

Private student loans have gotten way more expensive

With that context in mind, it’s worth analyzing how the rise in interest rates has impacted borrowing costs for families. The numbers are staggering. As the Fed has hiked interest rates, private loan borrowing costs have more than doubled since November of 2021. The average interest rate on a 10-year private student loan has jumped from a low of 3.3% in November 2021 to 7% at the end of May 2023. Interest rates for 5-year private loans have skyrocketed even faster, jumping from a low of 2.4% all the way to 8.70% across the same period.

This has huge adverse implications for families. The average balance of a private student loan in May 2023 was $54,921, and applying the change in interest rates to that figure reveals a brutal rise in borrowing costs. A family that took out a $54,921 loan with a 10-year term in November of 2021 would have to make $9,788 of interest payments across the lifetime of the loan, with a monthly payment of $539. The same loan in May 2023 would require $21,702 of interest payments across the lifetime of the loan (a 2x increase!) with a monthly payment of $639.

The impact on 5-year loans has been even more extreme. In November 2021, a 5-year borrowed would have had to pay $3,430 in lifetime interest costs, with a monthly payment of $973. By May 2023, the same borrower would be stuck paying nearly four-times as much in interest, $13,004, with a monthly payment of $1,132.

Families need better ways to pay for a college education

For many years, colleges and universities did not have to worry about private student loan costs, as rates remained low for more than a decade following the 2008-10 global financial crisis. But the rise in private student loan costs is having a real impact on enrollment decisions. A May 2023 survey of CollegeVine members found that thousands of families ended up choosing cheaper private or public college options in lieu of taking out private loans at current, elevated rates. If an institution saw a drop off in full or partial pay deposits this May, rising private loan costs likely played a critical if hidden role.

Middle income families being asked to pay $20,000 or more out pocket face a Faustian bargain. They can either choose to liquidate a substantial chunk of their financial cushion and retirement nest egg to make a lump sum payment each semester. Or they can elect to take out a private student loan, signing up for tens of thousands of dollars of interest payments across the lifetime of the loan.

Ultimately, American families need better and more flexible mechanisms to pay for a college degree. Twice per year lump-sum payments are important for institutional cash flow, but they create immense hardship for middle income (and even upper middle income families). Education financing for these families in the US should not be predicated on high-interest borrowing.