Record Lows For Federal Student Loan Rates 2020-2021

COVID-19 has truly impacted every aspect of our lives. From mandatory mask rules to restaurant shutdowns and more, it’s no secret that many of us are just trying to stay sane. However, due to the massive hit our economy has taken, interest rates are at an all time low. As a result, the interest rate that will be charged for student loans this fall is going to be the lowest in a decade.

The interest rates for federal student loans for the following year are set based on the May 10-year Treasury notes auction. The 2020-2021 rates are effective July 1, 2020 through June 30, 2021.

2020-2021 New Federal Student Loan Rates

According to Forbes, Based on today’s 10-year Treasury auction, we will see the following rates for the 2020-2021 year:

  • Undergraduate Direct Loans: 2.75%
  • Graduate Direct Loans: 4.30%
  • Graduate and Parent PLUS Loans: 5.30%

This represents a significant savings over current rates – a 1.78% rate reduction. Student loan interest rates are set for the following year based on the May 10-year treasury auction, plus an add-on interest rates. Given that the May 2020 10-year Treasury yield was 0.70%, we get the rates listed above.

The Department of Education uses the following formulas:

  • Undergraduate Direct Loans: 10-year Treasury yield plus add-on of 2.05%
  • Graduate Direct Loans: 10-year Treasury yield plus 3.6%
  • Parent and Grad PLUS loans: 10-year Treasury yield plus 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.

Common Questions

What Will Be Our Savings?

According to Credible, this rate decrease has the potential to save borrowers over $9 billion in interest over 10 years. That’s a huge savings.

The average savings on federal student loans taken out during the 2020-21 academic year will range from $669 for undergraduates to $2,797 for graduate students taking out federal PLUS loans at higher rates.

Are Private Student Loans Included?

These rates are for federal student loans. Private student loans already follow the 10-year treasury note pretty closely, but they also take into account borrower ability to repay, credit worthiness, and more.

If you have private student loans, now could be a good time to refinance, if you qualify. Rates are near historic lows for highly qualified borrowers.

However, it rarely makes sense to refinance a federal student loan into a private loan. By doing so, you would give up options like income-driven repayment, loan forgiveness, and your current COVID-19 forbearance and 0% interest.

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