2020-2021 federal student loan rates drop to record highs
Federal student loan interest rates for the following year are set based on the month of May 10-year treasury bill auction. This auction has taken place today, and we now know the student loan interest rates in effect from July 1, 2020 to June 30, 2021.
That’s a big deal – with the recent economic turmoil, interest rates have fallen to all-time highs. As a result, the interest rate charged for student loans this fall will be the lowest in a decade.
It is important to note that these rates only apply to loans that start after July 1, 2020. If you have existing loans, your rate is locked in based on when you took out your student loan.
2020-2021 New Federal Student Loan Rates
Based on today’s 10-year Treasury auction, we will see the following rates for the year 2020-2021:
- Direct Undergraduate Loans: 2.75%
- Direct loans to graduates: 4.30%
- Graduate and Parent PLUS Loans: 5.30%
This represents a significant saving compared to current tariffs – a rate reduction of 1.78%.
How student loan rates are set
Student loan interest rates are set for the following year based on the 10-year Treasury auction in May, plus an additional interest rate.
Since the 10-year Treasury yield in May 2020 was 0.70%, we get the rates listed above.
The Ministry of Education uses the following formulas:
- Direct Undergraduate Loans: 10-year Treasury yield plus an add-on of 2.05%
- Direct loans to graduates: 10-year Treasury yield plus 3.6%
- Parent and Grad PLUS loans: 10-year Treasury yield increased by 4.6%
Congress has set upper limits capping student loan interest rates at 8.25% for undergraduate loans, 9.5% for graduate loans, and 10.5% for PLUS loans.
How much will it save?
According to Credible, this rate cut could save borrowers more than $ 9 billion in interest over 10 years. It is a huge saving.
Average savings on Federal Student Loans taken out in the 2020-2021 academic year will range from $ 669 for undergraduates to $ 2,797 for graduate students taking Federal PLUS Loans at higher rates.
What about current borrowers?
These rates are for borrowers who take out student loans from July 1, 2020 to June 30, 2021. If you are a current borrower, your rate is locked in based on when you received your loan.
However, at present all federal loans are at 0% interest due to COVID-19 student loan assistance programs. No payments or interest will accrue on eligible federal student loans until September 30, 2020.
It is a great saving for borrowers in this time of need.
What about private student loans?
These rates are for federal student loans. Private student loans already track 10-year treasury bills very closely, but they also take into account the borrower’s repayment capacity, creditworthiness, etc.
If you have private student loans, now may be a good time to refinance, if you qualify. Rates are close to historic lows for highly qualified borrowers.
However, it rarely makes sense to refinance a federal student loan into a private loan. In doing so, you would forfeit options like income-based repayment, loan cancellation, and your current COVID-19 forbearance and 0% interest.