The interest rate on student loans for new undergraduates student loans fell to just 2.75% for the year 2020-2021, down from 4.53% last year. The historically low interest rate, which was announced in May and will take effect July 1 for both subsidized and unsubsidized direct student loans, presents a unique opportunity for borrowers.
In addition to the drop in the undergraduate loan rate, the interest rate on unsubsidized direct federal loans for graduate students will be 4.3%, down from 6.08% in 2019-20, and the rate d ‘Interest from Federal Direct PLUS Loans, including Graduate PLUS and Parent PLUS Loans, will be 5.3%, against 7.08%.
These interest rates, which do not apply to private student loans or existing federal student loans, are fixed for the term of the loan. The government sets federal student loan interest rates for the upcoming school year based on the high yield of the 10-year treasury bill auction each May, plus an additional percentage that varies depending on the type of loan and whether the loan is given to an undergraduate or graduate student. Latest rates apply to new federal student loans borrowed between July 1, 2020 and June 30, 2021.
Federal student loan type
2019-2020 interest rate
2020-2021 interest rate
|Subsidized Direct Loans and Unsubsidized Direct Loans for Undergraduates||4.53%||2.75%|
|Direct unsubsidized loans for graduate students and professionals||6.08%||4.30%|
|Direct PLUS loans for parents of dependent undergraduates and for graduate or professional students||7.08%||5.30%|
Source: US Department of Education
Experts point to the economic slowdown triggered by the global coronavirus pandemic as the reason for the historic drop in interest rates.
“The rates are announced each year around this time, set by Congress at a certain percentage above the base rate,” says Brenda Hicks, director of financial aid at Southwestern College in Kansas. “I guess they’re trying to stimulate the economy a bit during this pandemic.”
To take advantage of the lower interest rates, currently enrolled students or students starting college this fall should consider taking out student loans, Hicks says – even if they had no intention of doing so.
“It’s a good year to borrow,” says Hicks. “In my opinion, this is a smart option this year, and it could lead to people who don’t normally borrow or people who have invested and saved to join us.”
A family that has saved diligently and has enough funds invested to pay for their education, for example, might consider taking out undergraduate student loans at that low interest rate to avoid selling their investments when the stock market is down. declining, as is currently the case. Borrowing student loans could allow the family to wait for the economy and the stock market to recover more fully before selling these investments, Hicks says.
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As millions of Americans file for unemployment and experience pay cuts and time off due to a temporarily closed economy, many families will be worse off financially this fall. Cody Hounanian, program director for the nonprofit advocacy group Student Debt Crisis, says low interest rates on federal student loans are good news, but their tangible impact on borrowers will be limited.
“New student loan borrowers will have the lowest rate in history, but it couldn’t have happened at a worse time,” Hounanian said. “We are going to have fewer people in education and more people take sabbaticals or to give up ”due to the coronavirus pandemic.
Meanwhile, existing borrowers face their own challenges. Data from the May survey provided by Student Debt Crisis shows that among nearly 39,000 respondents, 33% of federal student loan borrowers were already struggling to pay their payments before COVID-19, and 46% expect have a hard time in six months later federal relief that the temporarily suspended payments must end.
“These rates do absolutely nothing for these borrowers,” Hounanian says. “There is no federal student loan refinancing option … It’s a great reminder of why we need this option, because with many borrowers paying over 6% and even more. , they could refinance at this historically low interest rate, and that would be extremely beneficial. “
Although there is no federal option, borrowers holding federal student loans may be able to refinance these loans in a private loan to possibly get a lower interest rate. Experts make a few notes of caution when considering this option.
Laurel Taylor, Founder and CEO of FutureFuel.io, an online platform that helps borrowers manage student debt and repayment options, says that because of the risks associated with this choice, refinancing is better for those borrowers. borrowers earning over $ 150,000 per year who have high credit. scores.
“It is extremely important for users and households to think about the tradeoffs of losing protections, such as suspending payments during the pandemic, so it is important to be educated,” she says.
Hicks also advises borrowing smart and educating yourself about all options, from exploring scholarships to learning more about federal student loan borrower protections.
“Make sure you use all of your resources and set goals for yourself,” Hicks says. “If you have a difference between the cost and the amount of your financial assistance, you can fill this void with a loan but you can also do it through work and savings or scholarships. Now is a good time to call your financial aid office to discuss your plan for the next year, ”she says, especially if a student’s financial situation has recently changed.
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