Federal student loan interest rates for the upcoming school year will be lower than ever, outstripping the previous record from 2005

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • Federal student loan interest rates are at a historic low for the 2020-2021 school year.
  • All undergraduate federal student loans will carry a 2.75% interest rate, while graduate student loans are set at a 4.3% interest rate. The previous record low was 2.875% set in 2005.
  • This year's interest rates are 1.78% lower than last school year's rates across all loan types.
  • Learn more about getting or refinancing a student loan with CommonBond »

Federal student loans will be much more affordable during the 2020-2021 school year, according to new interest rates from the Department of Education. 

Since March 2020, interest rates across the board have fallen as the Federal Reserve cut the federal funds rate. Lower interest rates will make both federal and private student loans cheaper for this school year, sending the federal student loan interest rate to record lows. 

The federal student loan interest rate changes with each school year a student borrows money, and changes based on the type of loan taken. For the 2020-2021 school year, borrowers will pay between 2.75% and 5.3%, depending on the loan type.

Loan type

Interest rate
Direct subsidized student loan – Undergraduate 2.75%
Direct unsubsidized student loan – Undergraduate 2.75%
Direct unsubsidized student loan – Graduate 4.30%
Direct PLUS loans 5.30%
Federal Perkins loans 5.00%

All undergraduate students taking unsubsidized or subsidized loans will pay an interest rate of 2.75%, while graduate students will pay 4.3%. 

This year's student loan interest rate is the lowest on record, beating out the previous low of 2.875% set in 2005, according to Mark Kantrowitz, a student loan expert and vice president of research at Savingforcollege.com.

Over the past 10 years, undergraduates have typically paid between 5% and 3.4% interest, according to Department of Education data. Graduate student loans have charged between 5.31% and 6.21%, and PLUS loan borrowers between 7.9% and 6.31%, depending on the school year.

Academic year Undergrad subsidized interest rate Graduate unsubsidized interest rate PLUS Loan interest rates
2020-2021 2.75% 4.3% 5.3%
2019-2020  4.53% 6.08% 7.08%
2018-2019 5.05% 6.6% 7.6%
2017-2018 4.45% 6% 7%
2016-2017 3.76% 5.31% 6.31%
2015-2015 4.29% 5.84% 6.84%
2014-2015 4.66% 6.21% 7.21%
2013-2014 3.86% 5.41% 6.41%
2012-2013 3.4% 6.8% 7.9%
2011-2012 3.4% 6.8% 7.9%
2010-2011 4.5% 6.8% 7.9%

Last year, undergraduate student loans carried a 4.53% interest rate, while graduate student loans carried an interest rate just over 6%, and PLUS loans just over 7% interest. This year, students will pay 1.78% less than last year.

Former students can lower their interest rate by refinancing

This school year's lower interest rates won't change student loan interest rates retroactively. However, recent grads can benefit from lower interest rates  by refinancing their student loans. Refinancing — replacing your existing loan with a new, private loan with a lower interest rate — could help you lower your student loan's interest rate. With interest rates so low, you may find one lower than your current loan's rate, and refinancing could help you save.

However, it's worth noting that refinancing may cause you to lose any benefits, such as protections the Department of Education has put in place during the coronavirus pandemic. All federal student loans in repayment are in automatic forbearance, with interest rates set to 0% and automatic payments suspended until September 30. Refinancing turns federal student loans into private student loans, which are ineligible for this forbearance.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

Source: Read Full Article