Federal Student Loans Now With The Lowest Rates In History

Did you know the interest rates charged on federal student loans have been reduced massively? This has proven to be an extraordinarily positive development for the families who are struggling with the financial crisis resulting from the current pandemic situation. 

According to the general manager of Credible, Mr. Robert Humann, interest rates for federal student loans have never been so low compared to their historical rates.

Read on to learn about its impact on the economy. 

How Loan Rates Work

As the COVID-19 pandemic continues to unfold, investors are in search of lower risks and the US Treasury is among them. Hence, the yield (annual return on investment based on the price) on the standard 10-year Treasury note, which moves opposite to the price of these government bonds, has fallen amid high investment demand which has pushed prices higher.

Given the current prevailing market circumstances for 10-year Treasury which has brought yields and interest rates lower, students can obtain a break of around 1% for both private as well as federal student loan rates. Here are some points that will help you understand how the rates work: 

• The interest rates for federal student loans for undergraduates have fallen around 2% for all the loans taken in the period 2020-21. 
• The interest rates for student savings are projected to fall around 1% for the year 2020-21. 
• The interest rate for new private student loans has dropped to 4% on fixed-rate and as low as 1.5% on variable-rates.

Why This Year Will Bring About The Lowest Rates

As per the latest 10-year Treasury auction which was responsible for setting federal student loan rates, the revised rates for the 2020-21 year for various loan types are as follows: 

• Rates for Undergraduate Direct Loans is 2.75% 
• Rates for Graduate Direct Loans is 4.30% 
• Rates for Graduate as well as Parent PLUS Loans are 5.30% 

The overall savings compared to the current rates comes with a reduction of around 1.78%. The rates have made it possible for borrowers to save around $9 billion on interest over 10 years which is indeed a major amount. The rates would be applicable for borrowers who apply from July 2020 to the last date of June 2021. 

Again, for current borrowers, the rate is locked on the basis of the loan amount received, and when it was issued. Due to the COVID-19 situation, all eligible federal loans are charging 0% interest during the mandatory forbearance period. There will be no payments demanded for interest on qualifying loans until the end of September 2020. 

The Impact

The current coronavirus situation is evolving in unexpected ways and its impact on student loan rates was unforeseen. Due to the extent of the national emergency, interest rates have trended low and very quickly. 

Still, the reduction in interest rates doesn’t mean that monthly payments on outstanding undergraduate loans are also falling as a result, despite temporary forbearance measures. Lower interest rates are only applicable for loans underwritten for the academic period stretching from July 1st 2020 to July 1st 2021, and not existing loan balances. 

Refinancing older federal student loans is not available at these lower interest rates, but borrowers can still consider refinancing current government loans with the use of private lenders to reap the benefits of falling rates. Yet, borrowers must remember that private refinancing of federal loans can result in the loss of some key protections and opportunities like loan forgiveness.

What About Fall Semester?

Federal student loans and interest rates are among the most concerning topics for colleges. The crushing impact of nearly 33 million citizens finding themselves unemployed is especially disconcerting for college students attempting to finance their degrees. 

For any family experiencing financial distress during this period, parents need to apply for the free application for federal student aid based on the changes in their income. Additionally, colleges need to work hard to deliver aid for students struggling to repay outstanding loans. If colleges are unable to provide additional financial help, they can still assist by not raising tuition fees and other expenses.

Bottom Line

Interest rates for federal students loans are primarily defined by undergraduate or graduate status, whether a borrower is a parent or student, the kind of loan (subsidized or unsubsidized), the loan program (FFEL or Direct Loan), the status of the loan, grace periods, in-school periods, deferments, and forbearances. 

For current students, the latest developments could not have come at a better time. However, for graduates with outstanding loans, seeking private refinancing options may be the best way to take advantage of falling interest rates.