2020-2021 federal student loan rates drop to record lows

The interest rates for federal student loans are dropping to record lows.

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The interest rates for federal student loans for the following year are set based on the May 10-year Treasury notes auction. That auction took place May 12, 2020, setting the interest rates for student loans effective July 1, 2020 through June 30, 2021.

This is a big deal—with the recent turmoil in the economy, interest rates have fallen to record low levels. As a result, the interest rate that will be charged for student loans this fall is going to be the lowest in a decade.

It’s important to note that these rates are only for loans that originate 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 the May 12, 2020, 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.

How student loan rates are set

Student loan interest rates are set for the following year based on the May 10-year Treasury auction, plus an add-on interest rate.

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%
  • Grad and Parent 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.

How much will this save?

According to Credible, a student loan comparison site, 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 2020-2021 academic year will range from $669 for undergraduates to $2,797 for graduate students taking out 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’re a current borrower, your rate is locked in based on when you received your loan.

However, right now, all federal loans are at 0% interest due to the COVID-19 student loan assistance programs. No payments and no interest will accrue on qualifying federal student loans until January 31, 2021.

That’s a great savings for borrowers in this time of need.

What about private student loans?

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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