Here’s some good news for college students waiting for word about the reopening of campuses for the upcoming 2020-2021 academic year: Federal student loan interest rates will fall to record lows.
The new rate for undergraduate loans direct — known as direct Stafford Loans — will drop to 2.75% from 4.53% in the current academic year, according to Savingforcollege.com. For graduate student direct loans and Parent and Grad PLUS loans, the new rates will be 4.30% and 7.08%, respectively. Rates for all three types of loans are 178 basis points lower than current rates, and they apply only to new loans.
These interest rates are based on a formula using specific spreads to the high yield of the last 10-year Treasury note auction in May, which took place today, explained Mark Kantrowitz, publisher and vice president of research at savingforcollege.com, in a note. The high yield in that auction was 0.70%, well below the 2.479% recorded a year earlier.
The Department of Education, which administers the federal student loan program, has not yet disclosed the new loan rates for the next academic year but it is expected to base its calculation on the same formula that savingforcollege.com used in its announcement.
The new lower rates will save borrowers about $100 per year, or about $1,004 over 10 years, per $10,000 borrowed, according to Kantrowitz.
Students and graduates with existing loans cannot take advantage of the new rates by refinancing into new federal student loans, but they may be able to refinance via private student loans. Those loans, however, do not offer programs that allow interest waivers, payment pauses or income-driven repayment, loan forgiveness or deferment or forbearance options.
Private student loan rates, however, have also declined, to as low as 4% on fixed-rate loans and 1.5% on variable-rate loans, according to Savingforcollege.com.
Current student loan borrowers have benefited from provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act, including the suspension of student loan payments for six months through Sept. 30 and suspension of involuntary collections on defaulted loans.
Beyond the benefits of temporary delays in loan payments and lower borrowing rates to pay for on-campus or at-home learning this fall, college students may find that financial aid packages are less generous just when the need is greatest.
“Colleges are getting squeezed by the pandemic [while] parents of college students are affected by record unemployment,” says Kantrowitz, who expects that appeals for more financial aid will double or even trouble this fall.
He anticipates college enrollment will drop by 10% to 20% come September due to increased financial hardship for students and their families, decline in full fare-paying international students — “even if our borders are open will they want to school in the most infected country on the planet”— and more students choosing a gap year before starting or a leave of absence if already enrolled.
All those developments will squeeze college revenues overall and public institutions will likely experience a decline in state funding.
“The biggest risks come from cuts in state funding and a potential drop in enrollment, writes Dick Startz, a professor of economics at the University of California, Santa Barbara, in an article for the Brown Center on Education Policy at the Brookings Institution. “And it’s going to be a while before we know where finances are going to land.”
Classes at Startz’s campus as well as 22 others in the California State University system will be held almost exclusively online this September, according to an announcement Monday by Chancellor Timothy White.