Federal student loan interest rates for 2021-22 have increased compared to the historically low rates of 2020-21, but the good news is that they will still be lower than they were two and three years ago.
This means it will still be relatively cheap for students and parents to borrow new federal loans to help pay for college for the upcoming academic year.
Here are the new rates from the U.S. Department of Education, based on the latest determining data from the U.S. Treasury:
2021-22 Federal Student Loan Interest Rates
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 | 3.734% |
| Direct PLUS Loans | Parents | 6.284% |
These new interest rates are for new borrowers who take out new loans during the period of July 1, 2021 through June 30, 2022.
This year’s rates are still relatively low, even though they have increased compared to last year’s historic plunge. Last year, student loan interest rates plummeted due to the economic impact of the COVID-19 coronavirus.
Rates have now bounced back considerably compared to last year, but they are still favorable for students and parents who take out federal loans for college for the 2021-22 academic year. It will still be cheaper to borrow than it was two and three years ago, when rates were around 0.75 percentage points higher, at 4.53% and 7.08% respectively.
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. In the May 12, 2021 Treasury auction, the yield on the 10-year note came in at 1.684, so the new Direct Loan interest rate for the 2021-22 academic year will be 3.734%, and the Direct Parent PLUS loan rate is projected to be 6.284%.
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.
