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Student loan interest rates edge higher and higher

  • Students trying to bridge the gap between savings and scholarships increasingly turn to private loans.
  • Those loans are getting more expensive as interest rates rise.
  • The average variable rate on a private student loan is now 7.81 percent, while the average fixed rate stands at 9.66 percent.
Students protest ballooning student loan debt for higher education and rally for tuition-free public colleges in New York
Cem Ozdel | Anadolu Agency | Getty Images
Students protest ballooning student loan debt for higher education and rally for tuition-free public colleges in New York

When it comes to college, tuition costs rising, and so are the interest rates on the loans to cover the tab.

Earlier this month, interest rates rose on new federal loans for the coming year. For new loans disbursed from July 1, 2017, to June 30, 2018, undergraduates will pay 4.45 percent. That's an increase from this year's rate of 3.76 percent.

And the private student loan market, which is already a more expensive way to borrow, is also edging higher. Both variable and fixed interest rates on private student loans rose nearly a point over the last year, according to a recent report by LendEDU, an online marketplace for student loans and student loan refinancing.

The average variable rate on a private student loan is now 7.81 percent, while the average fixed rate stands at 9.66 percent, LendEDU said. (See chart below.)

"Students are put in a tough spot," said Michael Brown, a research analyst at LendEDU. "With tuition costs continuing to rise, federal loans won't cut it, so some are forced to take private student loans, where the interest rates are high right now." (Tuition has historically risen about 3 percent to 5 percent a year, according to the College Board.)

While most student borrowers rely on federal student loans, more than 1.4 million students a year use private student loan debt to bridge the gap between the cost of college and their financial aid and savings, LendEDU said. The site based its findings on 80,000 users who inquired about private loans over the last year.

The top concern parents and students said they now share — across the board — is the amount of debt they are about to take on to pay for a degree, according to a separate report by The Princeton Review. Contrast that to a decade ago, when the most commonly cited answer was not getting into their first-choice school.

About 60 percent of graduates leave college with some amount of student debt, owing an average of $28,400 per borrower, according to LendEDU.

Altogether, total student loan debt in the U.S. tops $1.4 trillion (including more than $165 billion of private student loan debt), which makes it the second-largest expense an individual is likely to make in a lifetime — right after purchasing a home.