There’s positive news for students and parents who need to take out federal student loans to help pay for college during the 2020-21 school year.
Student loan interest rates have plummeted due to the economic impact of the COVID-19 coronavirus, reaching historic lows and dropping for the second straight year.
Here’s a quick breakdown of the new federal student loan interest rates for the coming school year:
2020-21 Federal Student Loan Interest Rates
Projected rates for new loans disbursed on or after July 1, 2020 and before July 1, 2021.
|Loan Type||Borrower||Fixed Interest Rate|
|Direct Loans (both subsidized and unsubsidized)||Undergraduate||2.75%|
|Direct PLUS Loans||Parents||5.30%|
All rates shown in this table are fixed rates. They won’t change during the life of the loan.
Are You Choosing the Best Student Loan?
Read my article to learn about the best student loan options to help you pay for college, save money, and avoid graduating with debt.
Will These Rates Affect My Current Loans?
New interest rates apply only to new money you borrow for the upcoming school year. If you’ve previously taken out a federal student loan, your interest rate does not change.
However, the federal government has temporarily set interest rates at 0% for existing Direct Loans and Parent PLUS Loans, and it has temporarily suspended loan payments under the CARES Act.
These measures were enacted to respond to the economic impact of COVID-19, but they are set to expire after September 30, 2020. You can get more details on the office of Federal Student Aid’s page on coronavirus and student loan forbearance.
What Determines These Interest Rates?
Federal student loan interest rates are determined by federal law and based on the results of a U.S. Treasury auction that takes place each May. At the auction, the U.S. Treasury issues debt securities to investors, and the Treasury yield is the interest rate the government pays on that debt.
If this sounds like gobbledygook, don’t worry. All you need to know is that the May Treasury auction determines student loan interest rates each year. Rates will either go up, go down, or stay the same, depending on the results of that auction and the resulting 10-year Treasury yield.
Federal law fixes Direct Loan interest rates at 2.05 percentage points above the 10-year Treasury yield. Parent PLUS Loan rates are fixed at 4.60 percentage points above the 10-year Treasury yield. Since the yield was 0.70 at this year’s auction, the new Direct Loan interest rate is now 2.75% and the Direct Parent PLUS loan rate is 5.30%.
Do These Rates Apply to Private Student Loans?
Federal student loan interest rates have no impact on private student loans. Interest rates for private student loans are set by individual banks or other financial institutions. However, it’s always a good idea to compare federal student loan rates with those you might get from a private lender. Private student loan rates can sometimes be better than federal rates, depending on your credit and qualifications.
How Will My Interest Be Calculated?
A daily interest formula determines the amount of interest that accrues on your loan between your monthly payments. Here’s how the formula works:
Outstanding Principal Balance x Interest Rate Factor x Number of Days Since Last Payment = Interest Amount
In other words, the formula multiplies your loan balance by the number of days since you made your last payment, and it multiplies that result by the interest rate factor. The interest rate factor is determined by dividing your loan’s interest rate by the number of days in the year.
Where Can I Learn More?
Before you borrow, it’s important to understand student loans, whether they’re the right fit for you, and their impact on your college financial planning. To learn more about federal and other types of student loans, read my article on the Best Student Loan Options for 2020-21.
You can also learn more about all forms of federal aid in my article on the 5 Types of Federal Financial Aid.
When planning for college, it’s also an important first step to estimate how much your family will be expected to pay toward college costs. This will help you determine how much financial aid you’re likely to receive, and you can use your estimate to figure out if you may need to use student loans or find other funding sources.
You can calculate your estimate based on current federal aid formulas by using my Expected Family Contribution (EFC) Calculator.
Additionally, you can learn more about federal student loans at the official Federal Student Aid website, although the new interest rates won’t be officially published there until July 2020.
As always, you can engage my services to help you understand student loans and develop a complete college funding plan for your family. Contact me now to learn more and get started.