Low Interest Rates for Student Loans

Whether you just graduated high school, took a few years off from college, or thinking about going back, this could be the year to start your classes. In May, federal student loans were announced to have dropped significantly for the 2020-2021 academic year.

Effective on July 1st, the interest rate for direct subsidized and unsubsidized student loans is 2.75 percent. That’s almost a 2 percent drop from last year’s 4.53 percent. This is a savings of around $100 in interest each year for every $10,000 that an undergraduate borrows. 2005 was the last time interest rates on student loans were this low where it was 2.88 percent.

Other Student Loan Interest Rate Cuts

Undergraduates who are eligible for subsidized and unsubsidized federal student loans aren’t the only ones who can take advantage of lower interest rates. Graduate students who are federal direct unsubsidized will get a lower interest rate from 6.08 percent to 4.3 percent this year. Federal direct PLUS loans (Parent PLUS and Graduate PLUS) have also been cut from 7.08 percent to 5.3 percent.

Here’s a full comparison chart of the changes from 2019-2020 and 2020-2021 on federal student loans.

Student Loan Type                             2019-2020                             2020-2021
Direct subsidized loans/                   4.53%                                      2.75%
Direct unsubsidized loans
For undergraduates

Direct unsubsidized loans                6.08%                                     4.30%
For Graduates and Professional

Direct PLUS loans for                       7.08%                                      5.30%
Parents and Graduate and
Professional Students

It’s important to note that these interest rate reductions don’t apply to your existing federal student loans or private student loans. Consider looking into refinancing those types of student loans to see if you can potentially benefit from a lower interest rate or other benefits.

Why Federal Interest Rates on Student Loans Change

Every year, the federal government will determine what the interest rate will be on federal student loans. They calculate this amount by looking at many factors, the most important based on the high yield of the 10-year Treasury note auction that occurs in May.

Depending on the type of loan and whether it’s for an undergraduate or graduate student, they add a certain percentage to that yield. These rates are set to apply from July 1 to June 30 for new federal student loans that are borrowed between that period.

How COVID-19 Affected Rates

Undoubtedly the global coronavirus pandemic which we are still dealing with is a heavy factor in this year’s dramatic decrease in student loan interest rates. The United States and the world are still recovering from the economic downturn that was triggered by events earlier this year.

More than likely these new rates were motivated by the hope to help boost the economy. For potential students who are considering whether to attend school this fall, the low interest rates could be a reason to take advantage of the situation.

If you have current federal student loans, you might be able to refinance with a private student loan to get a better rate. However you will lose some potential benefits. Federal student loan borrowers currently have their payments paused until the end of October without interest accruing on their loans as a result of federal relief efforts.

Call Student Loan Medix for a free, no obligation consultation at (480) 676-2889 or email us at tracey@freestudentloanadvisors.com.