Record Low Student Loan Rates Expected in the Fall

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.

(Related: 8 Ways the Stimulus Package Helps Student Loan Borrowers)