If you have plans to attend college in the fall of 2020, you have an opportunity to save considerable money because of falling interest rates on federal student loans.
On May 12, 2020, the Department of Education published the new federal student loan interest rates, and the numbers are the lowest we’ve seen in over a decade.
If you’re looking for help paying for a college education, this is a great time to put federal student loans at the forefront of your financing plan.
Why you should prioritize federal loans right now
Federal student loans, as a general rule, are a better option than private loans.
Loans taken out through the government are typically more flexible than private loans and give you access to income-based payment plans and loan forgiveness programs. Most federal loans don’t have credit requirements either.
Current student loan interest rates make the argument for federal loans even more convincing. The new student loan interest rates were released on May 12, 2020.
Here are federal student loan interest rates for borrowers in the fall of 2020 through most of 2021:
- Subsidized Loans: 2.7%
- Unsubsidized Loans: 4.25%
- PLUS Loans: 5.25%
The interest rate for undergrads dropped nearly 2% from last year, with unsubsidized loans and PLUS loans also dropping that much or more. If you’re eligible for federal student aid, this is your chance to cut your future student loan debt considerably.
Plus, with the economy in a downturn, there’s a chance that 0% interest rates will be extended even further than originally planned.
Interest rate history for federal student loans
Federal student loan interest rates are set each year following the May Treasury Auction, based on the 10-year Treasury note rate. The Treasury note rate for this year is 0.65% (as of May 5, 2020), considerably lower than in recent years.
To get an idea of how current rates compare to past rates, take a look at these federal student loan interest rates from the past decade:
Federal Student Loan Interest Rates Since 2010
Undergrad Direct Subsidized
Grad Unsubsidized Loans
7/1/19 - 6/30/20
7/1/18 - 6/30/19
7/1/17 - 6/30/18
7/1/16 - 6/30/17
7/1/15 - 6/30/16
7/1/14 - 6/30/15
7/1/13 - 6/30/14
7/1/12 - 6/30/13
7/1/11 - 6/30/12
7/1/10 - 6/30/11
You can see that the rates that were just released are well below where rates traditionally stand over the past 10 years. There’s no guarantee that this will continue beyond the upcoming academic year, so this is the time to lock in low rates.
Federal student loan rates vs. private student loan rates
Our team at Student Loan Planner® has spent time vetting private lenders so we only partner with the best options for our readers. If you look at the fixed-rate ranges through our lending partners, you’ll see that great rates are possible with private loans.
Something to keep in mind, though, is that the lowest rates you see are reserved for the highest-rated borrowers. To get those rates requires an almost “perfect storm” of the best credit score along with stellar credit history and a cosigner.
For a borrower with good credit, think more along the lines of an interest rate typically between 5.5% and 6.5%. With that context, private loan rates pale in comparison to the current federal interest rates.
PLUS loans are one example where private loan rates might be more comparable, especially considering PLUS loans have an origination fee of around 4.25%. Borrowers looking at PLUS loans should do the math to see if they make more sense than private loans.
When are private student loans still an option?
With record low federal student loan interest rates, there are few scenarios in which private loans will make sense to pursue. Here’s when it might make sense to apply for private loans instead of federal loans at current rates:
1. You missed out on the FAFSA deadline: The federal deadline to submit FAFSA forms online for the 2020-21 academic year is June 30, 2021.
2. You don’t have access to a cosigner: PLUS loans are the only federal student loans with a credit check. If you have poor credit and no access to a cosigner, your only option might be high-interest private loans that don’t require a cosigner.
Neither of these scenarios is ideal, but if you find yourself in one of these situations, private loans could become your best option.
Know your financing options before you go to school
Navigating student loan decisions isn’t an easy task. It’s one of the biggest financial decisions you’ll make in your lifetime. If you’re trying to determine the right course of action, our student loan consultants can help you design the perfect plan for managing student loan debt repayment in the future. Book a predebt consult to save yourself the aggravation and stress that can come with poor student loan choices.