CLOSEStudent loan rates are at historic lows: How to take advantage

College students who must cope with a new way of doing things in light of COVID-19 can take heart in one thing. Federal student loan rates are hitting historic lows. 

Beginning July 1, rates on federal student loans will tumble to reflect the Federal Reserve’s move this spring to push short-term rates close to 0%. The Fed noted in its emergency March 15 rate cut: “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.” 

Now for the 2020-2021 academic year, the interest rate on federal student loans for undergraduates has dropped to 2.75%, down from 4.53% last year. 

“The 2.75% interest rate is a new historic low,” said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

“The previous record low was in 2004-05 when interest rates were as low as 2.875%.”

Graduate students are looking at rates of 4.3%, down from the old rate of 6.08%. 

The Parent PLUS loan rate is 5.3%, down from 7.08%. The rate is the same for graduate PLUS loans. 

How much can you save with lower rates? 

Borrowers are expected to save billions of dollars over the next 10 years given the lower rates.

Savings could be as low as a few hundred dollars, depending on the type and the amount of debt, to up to a few thousand dollars.  One calculation estimates possible savings of $669 for undergraduates to $2,797 for graduate students taking out federal PLUS loans, according to estimates from Credible.com, an online marketplace to shop for lenders. 

The new rates do not apply to private student loans or to federal student loans that were taken out earlier to attend college. 

The new lower rates apply to federal student loans taken out between July 1 and June 30, 2021.

What’s happening to college game plans? 

Convincing someone that they still want to go to college in the fall could remain a hard sell even in light of lower rates. Many parents are worried about sending their children away to school if the COVID-19 outbreaks continue.

And college game plans aren’t what they used to be. Some families have seen widespread layoffs and job cuts during the pandemic; some college students aren’t making the kind of money they expected in hours or tips this summer. 

For some families, though, it may be a better year to borrow a bit more money, perhaps, if the student is already in college and able to limit borrowing in future years if interest rates edge back up in 2022 or 2023. Some well-off families might want to give their investments a bit more time to recover.

But there’s no guarantee that the stock market won’t drop further in future years or rates won’t stay low for some time. We have to recognize that much is unknown about the longer term economic impact of COVID-19. 

How do you calculate how much to borrow? 

Some old guidelines still apply when it comes to deciding how much to borrow for college. You still want to borrow as little as possible — controlling your debt by selecting an affordable school, tapping into savings, living like a student while in college, working some in school and applying for scholarships. 

A good rule of thumb is to aim to have total student loan debt at graduation that is less than your annual starting salary, according to Kantrowitz. If you do that, you should be able to repay your student loans in 10 years or less.

And keep careful track over the years of how much you’ve borrowed in federal student loans, as well as private loans if you tap into those loans too. 

“Students should start putting together a plan for repaying their student loans before they graduate,” said Robert Humann, general manager for Credible.com. 

“You should have a good idea of what your total student loan debt will be, the interest rates on each of your loans, and what you expect to earn with your degree,” Humann said.

If you have that information, you can use the Department of Education’s loan simulator to see what your monthly payment and total repayment costs will be in any of the government’s repayment plans. See studentaid.gov/loan-simulator. 

More: Unlocking FAFSA money for college is easier than ever: How to apply

The coronavirus pandemic is forcing universities to reconsider everything from how classes will be held to the 2020 college football season.

And it’s also possible that you might now qualify for more financial aid too.

“My best advice is to appeal for more financial aid if you’ve been affected financially by the coronavirus pandemic, especially if the parents have lost their jobs or experienced a furlough or pay cut,” Kantrowitz said.

Remember, many college students likely applied for financial aid before COVID-19 preventative measures shut down much of the economy. 

College students could begin applying for financial aid for the 2020-21 school year in October 2019 — long before the massive job losses and wage cuts that we’ve seen during the economic shutdown that has been part of the fight against the coronavirus. 

 The 2020-21 FAFSA is based on 2018 income, Kantrowitz said.

And he noted that the 2021-22 FAFSA — which students will start filing on October 1 — will be based on 2019 income, both of which are pre-pandemic and might not reflect economic reality now. 

So it may be more important to file the FAFSA but then contact your college to discuss how your current financial situation has changed. The school’s decision would be the final say and cannot be appealed to the U.S. Department of Education.

Contact Susan Tomporat 313-222-8876 or stompor@freepress.com. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.

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