In 2013, Congress created the current formula for setting federal student loan interest rates under The Bipartisan Student Loan Certainty Act. The Department of Education uses the yield from the 10-year May Treasury Note auction to set the rates that millions of students will borrow at.
Using this arcane formula, we now know that student loan interest for the 2020-2021 school year will be at the lowest level in more than 10 years.
Undergraduate interest rates will actually be at their lowest level EVER. Graduate school interest rates will be at their lowest level since approximately 2002-2006.
We’ll show you how low interest rates will be for students borrowing for the 2020-2021 school year as well as what you can do about your current student loan interest rates.
Summary of federal student loan interest rates starting July 1, 2020
Here are the rates for the coming school year:
|Loan Type||Interest Rate|
How are federal student loan interest rates set?
Take the high yield from the last 10-year Treasury Note auction in May and add the following to the result to get federal student loan interest rates for each kind of debt:
- Stafford Subsidized = 10 Year T-Note Yield + 2.05%
- Stafford Unsubsidized = 10 Year T-Note Yield + 3.60%
- Grad PLUS and Parent PLUS = 10 Year T-Note Yield + 4.60%
The 10-year Treasury note yield from the auction on May 12, 2020 resulted in a high yield of 0.70%.
Hence, take 0.70% and add that to the margin above to find the yield for each of the Federal student loan types.
Undergraduate student loan interest rates for 2020 to 2021
Undergraduates typically use three kinds of federal student loans to fund their education:
- Stafford Subsidized will be 2.75% (taken out in their name)
- Stafford Unsubsidized will be 4.3% (taken out in their name once the subsidized limit is met)
- Parent PLUS will be 5.3% (taken out in their parent’s names)
The undergraduate subsidized loan interest rate will be at the lowest level in history as far as I’m aware.
The only time Parent PLUS loans have been offered at this low of a yield would have been in the mid 2000s under a different set of student loan rules.
It’s not a stretch to say these interest rates for undergraduates are close to the lowest ever.
Graduate student loan interest rates for 2020 to 2021
Graduate students typically use two kinds of federal student loans, all taken out in their name alone, to fund their education:
- Stafford Unsubsidized will be 4.3%
- Grad PLUS will be 5.3%
These interest rates are the lowest for grad students since the mid 2000s.
We occasionally see legacy student loans from the 2002 to 2006 period at rates as low as 2% or 3% because of the odd loan rules that existed during that time, which allowed certain graduate school borrowers to lock in record-low rates on long term repayment schedules.
Many of these borrowers have chosen to pay back their loans over multiple decades due to the low interest rates.
Most graduate students have been stuck borrowing at 6% to 8% interest rates since that time.
Fees on federal student loans for 2020 to 2021
Keep in mind that on top of the interest rate on federal student loans, the origination fee poses an additional cost.
For Stafford loans, the upfront origination fee for 2020 to 2021 school year will be around 1%.
For Grad PLUS and Parent PLUS loans, the upfront origination fee for 2020 to 2021 school year will be around 4.25%.
These upfront fees to borrow federal student loans are added into the total balance and amortized accordingly.
Other interest rate considerations for students in fall 2020 and beyond
The CARES Act suspends all student loan interest until September 30, 2020. That period may well be extended.
Regardless of what happens with the CARES Act or if there is an extension of the interest suspension, the interest rates set by the formula above will be fixed.
With the ultra-low federal student loan interest rates for these loans, especially for Stafford loans, you may want to consider not refinancing these loans in the future as federal loans come with far superior borrower protections.
Should anyone consider private student loans for 2020 to 2021?
If you can lock in a lower interest rate with the federal government, you should never use a private lender to borrow.
If the interest rates offered to you are comparable, you should still use the federal student loan program.
The best argument for using a private student loan lender is if you don’t have a cosigner.
Additionally, some borrowers don’t complete the FAFSA in time, may not qualify for federal student aid for some reason, or have another uncommon obstacle to borrowing with federal student loans.
Since getting a degree on time is much better financially than waiting to borrow lower-cost debt, you should consider private student loans in these specific circumstances.
Schools want even lower interest rates
A group of higher education interests has lobbied Congress to suspend student loan interest and payments until June 30, 2021.
This group proposes that interest rates on federal student loans be lowered to 1.5% for newly disbursed student loans.
While these new interest rates don’t come close to the low level proposed by these universities and colleges, students will get some relief from the higher 4.5% to 7% rates charged for the 2019-2020 school year.
Can you access these interest rates if you already have student loans?
Unfortunately, these student loan interest rates are only available to students who are enrolled in a program for the 2020 to 2021 school year.
Your older loans cannot access these lower interest rates.
The only way to lower your federal student loan interest currently is to:
- Use the REPAYE plan if your income is low relative to your debt, or
- Refinance with a private lender.
Do you have questions about student loan interest rates for fall 2020 and spring 2021? Ask in the comments!