New Student Loan Interest Rates Drop to Record Lows for 2020-21

Each year, the interest rates on federal education loans are set in mid-May. Based on today’s Treasury note auction, we have just learned that interest rates for these loans will drop to an all-time low. Amidst so much disappointment about what next year will look like for students going to college, this is one piece of good news. 

students calculating costs
Interest rates for student loans will drop to a record low for 2020-21. (Twenty20 @TatianaMara)

Interest Rates for student loans, 2020-21 school year

Here are the three types of loans that are affected by these new rates:

Direct Undergraduate Loans (Subsidized and Unsubsidized)

Current rate – 4.53%

Estimated new rate – 2.75%

Direct Graduate Student Loans (Unsubsidized)

Current rate – 6.08%

Estimated new rate – 4.3%

Parent PLUS Loans and Grad PLUS Loans

Current rate – 7.08%

Estimated new rate – 5.3%

Here is a link to the online brochure that explains the basics of federal student loans: https://studentaid.gov/sites/default/files/direct-loan-basics-students.pdf

FAQs about new student loan interest rates

When do these new interest rates go into effect?

These new rates go into effect for all new loans disbursed between July 1, 2020 and June 30, 2021. 

How will these new rates make financing a college education less expensive?

At most institutions, federal loans are included in the student’s financial aid award. An interest rate drop of this size will make the eventual monthly repayment noticeably lower, and will substantially lower the total cost of the loan.

My child doesn’t qualify for need-based financial aid. Can we still take advantage of these lower rates?

Yes, absolutely! Any student, regardless of demonstrated need, can borrow up to the maximum amount of undergraduate or graduate student loans. Borrowing these low-interest loans can be a smart way to reduce the out-of-pocket cost of higher education. And most parents will qualify for PLUS loans as well. 

How much can a student borrow?

The annual limits on federal loans for full-time undergraduates are: $5,500 for a freshman; $6,500 for a sophomore; $7,500 for a junior; and $7,500 for a senior. If an additional semester or two are required for graduation, the lifetime limit for an undergraduate is $31,000.  Limits on graduate student loans, and on Parent PLUS loans, are substantially higher.

The federal table outlining federal student loan limits is here: https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized#how-much

Does this change the interest rate for loans I have already borrowed?

No. These new interest rates will be in effect for any new loans disbursed for this coming school year, beginning July 1, 2020. The interest rate for any loans you have already borrowed will remain the same as their current rate.

Under the CARES Act, my loan repayment has been paused. When my payments resume after September 30, will they have a new lower interest rate?
Unfortunately, no. The interest rate on any loans already disbursed remains the same.

Do these new interest rates apply to private education loans?

No, they apply only to the federal loans listed above. However, it is likely that private lenders will lower their rates as well, though probably not as low as these new federal rates. It will be necessary to check with each private lender to see how their loan products compare. In most cases, federal student loans will have the lowest interest rates, the best terms, and the most protections for the borrower.

The studentaid.gov website that explains some of the differences between federal and private loans is here: https://studentaid.gov/understand-aid/types/loans/federal-vs-private.

As most families know, a college education is an enormous expense, and the cost of higher education in this country is among the most expensive in the world. Yet a college degree is possibly the single best investment you can make in your child’s future. Becoming an informed consumer is a critical step in assuring that your college costs are manageable.

More to Read:

Ten Things You Need to Know about Student Loans

Paying for College: Six Crucial Things to Think About Right Now

Jeff Levy

Jeff Levy, CEP, is an educational consultant based in Santa Monica, California. He works with students locally, regionally, and internationally on their college search and application process, and with parents on college affordability and financial aid. He can be reached through his website.

Don't miss out!
Want more like this? Get updates straight to your inbox.