Student loan interest rates for 2021-22 won’t be determined until May of 2021. But current trends indicate they’re on track to increase compared to last year’s historic lows.
The good news is that interest rates will still be much lower than they were two and three years ago.
Here is my current projection of the rates we’ll be seeing from the U.S. Department of Education, based on the latest determining data from the U.S. Treasury:
2021-22 PROJECTED Federal Student Loan Interest Rates
Predicted rates for new loans disbursed on or after July 1, 2021 and before July 1, 2022.
|Loan Type||Borrower||Fixed Interest Rate|
|Direct Loans (both subsidized and unsubsidized)||Undergraduate||3.206%|
|Direct PLUS Loans||Parents||5.755%|
These new interest rates would be for new borrowers who take out new loans during the period of July 1, 2021 through June 30, 2022.
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It’s important to remember that these rates are not official. They’re only projections, and they could change in either direction between now and May 2021. That’s when the U.S. Treasury holds the auction that determines annual student loan interest rates.
But so far it’s looking like rates will remain relatively low, even though they will increase compared to last year’s historic plunge. Last year, student loan interest rates plummeted due to the economic impact of the COVID-19 coronavirus.
As of February 10, 2021, rates look like they will increase compared to last year, but they’ll still be very favorable for students and parents who take out federal loans for college for the 2020-21 academic year. It will still be much cheaper to borrow than it was two and three years ago, when rates were considerably higher.
How Do We Know Rates Might Increase?
Federal student loan interest rates are tied to the U.S. government’s cost to borrow. Each May, there’s a U.S. Treasury auction where the federal government issues debt securities to raise money from investors.
The Treasury yield is the interest rate the government pays on the securities it auctions off. And the yield on a 10-year Treasury note serves as the benchmark for federal student loan interest rates for the upcoming year.
After plummeting due to the impact of the COVID-19 coronavirus last year, the 10-year Treasury yield has been tracking at higher levels so far in 2021. Since student loan interest rates are pegged to this yield as a benchmark, it means student loan rates are projecting to increase this year.If this sounds like gobbledygook, don’t worry; here’s the important thing to know. Unless we see a major change in the Treasury market, federal student loan interest rates will be going up for new loans for the 2021-22 school year. But the good news is that rates will likely still be much lower than they were two and three years ago.
How Exactly Are Student Loan Interest Rates Determined?
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. Rates either go up, go down, or stay the same depending on the results of that auction.
Federal law fixes Direct Loan interest rates at 2.05 percentage points above the 10-year Treasury yield on notes sold to investors. Parent PLUS Loan rates are fixed at 4.60 percentage points above the 10-year Treasury yield. Since the yield on 10-year notes is tracking at 1.155 as of the February 10, 2021 auction, the new Direct Loan interest rate is projected to be 3.206% and the Direct Parent PLUS loan rate is projected to be 5.755%.
Will 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 loans and other ways to borrow, read my article on the Best Student Loan Options for 2021-22.
You can also learn a lot more about student loans, federal financial aid, and the best ways to plan and pay for college by taking my College Planning Jumpstart video course.
It’s a paid course, but the strategies and advice you’ll learn could potentially save you thousands of dollars on your college costs. For an affordable cost designed for families, I show you how to get and maximize financial aid, avoid or minimize student loans, save more money for college, and create a winning college financial plan.
To learn more or sign up now, check out the College Planning Jumpstart.