Interest rates on new federal student loans will drop by almost 40 percent on July 1, 2020, reaching a historic low in the aftermath of the coronavirus pandemic.
New Interest Rates on Federal Student Loans
The new interest rates for Federal Direct Stafford Loans for undergraduate students will be 2.75% in 2020-21, down from 4.529% in 2019-20. This beats the previous record low interest rate of 2.875%, which was reached in 2004-05.
Interest rates on Federal Direct Stafford Loans for graduate students will be 4.3%, down from 6.079%.
Interest rates on Federal Direct PLUS Loans, including Grad PLUS and Parent PLUS loans, will be 5.3%, down from 7.079%.
The new interest rates are fixed rates based on the 10-year Treasury Note auction on May 12, 2020.
Impact of Decrease in Interest Rates
A 40% drop in interest rates, however, does not yield as big a drop in monthly loan payments.
Loan payments include payments of principal in addition to interest, and the principal portion of the loan payments is not decreasing.
Monthly student loan payments will decrease by about 8%, assuming a 10-year repayment term, saving borrowers about $1,000 per $10,000 borrowed over the loan’s repayment term.
The Rate Cut is Limited to New Loans Only
Borrowers cannot refinance old federal loans into new federal loans to obtain the new interest rates.
The interest rate on a federal consolidation loan is the weighted average of the interest rates on the current loans, rounded up to the nearest 1/8th of a percentage point. This more or less preserves the cost of the loan and does not really reset the interest rate.
Borrowers can refinance federal loans (and private loans) into new private student loans, but the interest rates on fixed-rate private student loans have not dropped as much. The lowest fixed interest rate on a private student loan is 2.99% for borrowers with excellent credit.
Private student loans do not have the same benefits as federal student loans, such as deferments, forbearances, income-driven repayment and loan forgiveness.