Student loan rates are currently some of the lowest we’ve seen in history. However, while the rates might look attractive, there are still some things to consider before you take on student loan debt in this volatile economic climate.
Rates for federal loans issued between July 1, 2020, and June 30, 2021, will drop from 4.53% to 2.75% for undergraduate Stafford loans.
- All federal student loans are 0% interest and require no payments through Dec. 31st, 2020.
- Federal student loan interest rates are currently at record lows.
- Beginning July 1, 2020, federal student loan rates for undergraduate loans are 2.75%, graduate loans are 4.30%, and Parent PLUS loans are 5.30%.
- Private student loan rates haven’t seen a dramatic drop but aren’t expected to rise.
COVID-19’s Effect on the Education System
The coronavirus pandemic has ended the longest period of U.S. expansion since World War II, and it may take several years before the economy gets back on track. For the education system, it’s caused uncertainty for students looking to start or continue their degree and questions about new and existing student loans. Circumstances continue to change abruptly, but there are some answers.
Student Loan Debt Relief Options
The Coronavirus Aid, Relief, and Economic Security (CARES) Act set interest on federal student loans at 0% through Sept. 30, 2020, and borrowers have automatically been placed in an administrative forbearance, allowing them to temporarily stop making monthly loan payments, also through Sept. 30, 2020.
In August, President Trump issued an executive order extending the pause on federal student loan payments and 0% interest through December 31st, 2020.
All months of payment suspension will count as “qualifying payments” for borrowers working toward forgiveness under the Public Service Loan Forgiveness (PSLF) program or income-driven repayment.
Private lenders are also offering COVID-19 student loan relief, mostly in the form of disaster forbearance, but you must request it, and interest will accrue during the forbearance. Fortunately, most lenders aren’t capitalizing interest at the end of the disaster forbearance period.
School Enrollment Trends
Colleges and universities have opened their class and dorm rooms again with early trends both expected and unexpected. In the first few weeks of class, many schools have postponed sports, reported widespread quarantines, and switched in-person classes to virtual. Less expected are the trends with enrollment. Many thought that community colleges would see higher enrollment but early data shows enrollment is up for some large public universities while community colleges that serve many low-income students are down as much as 30 percent.
Student Debt Continues to Rise
Student debt continues to be an epidemic in our society. Since the 2008 recession, federal funding for public universities has decreased by 22%, while tuition costs have risen 27%. This has led to student loan debt that’s surpassed $1.6 trillion. The debt may get worse if the education system is forced to undergo more budget cuts and if more unemployed Americans take advantage of low interest rates to go back to school.
Should You Take Out a Student Loan Now?
With federal student loan rates at record lows, now might be the best time in history to take out a student loan. Always exhaust all your options for federal student loans first by using the Free Application for Federal Student Aid (FAFSA) form, then research the best private student loans to fill in any gaps. Whether you choose federal or private loans, only take out what you need and can afford to repay.
Try to take out no more in student loans than what you expect to make in your first year out of school.
If you have private student loans, this may be a great time to refinance. All of the best student loan refinance companies are offering competitive rates and can cater to unique debt situations.
How Are Student Loan Interest Rates Calculated?
Federal student loan interest rates for the fall are determined by the 10-year Treasury note auction every May plus a fixed increase with a cap.
- Direct Unsubsidized Loans for undergraduates – 10-year Treasury + 2.05%, capped at 8.25%
- Direct Unsubsidized Loans for graduates – 10-year Treasury + 3.60%, capped at 9.50%
- Direct PLUS Loans – 10-year Treasury + 4.60%, capped at 10.50%
Private student loan interest rates are determined by each lender based on market factors and the borrower’s and co-signer’s creditworthiness. Most private lenders also have a variable-interest-rate option, which typically fluctuates monthly or quarterly with the London Interbank Offered Rate (LIBOR).
While federal student loans don’t take credit scores and income into account, these factors play a big role in private lenders’ decisions. Students who don’t meet lenders’ credit requirements will need a co-signer. The 2017 Annual Report of the Consumer Financial Protection Bureau Student Loan Ombudsman noted that more than 90% of private student loans are made with a co-signer. However, even if you don’t have a good credit score or co-signer, there are lenders who offer student loans for bad credit and student loans without a cosigner.
What Are Current Student Loan Interest Rates?
Because of the coronavirus pandemic, the 10-year Treasury rate has seen record lows, and, as a result, federal student loan rates beginning July 1, 2020, are some of the lowest in history.
- Direct Subsidized and Unsubsidized Loans for undergraduates – 2.75%
- Direct Unsubsidized Loans for graduates or professional borrowers – 4.30%
- Direct PLUS Loans for parents and graduate or professional students – 5.30%
There is an origination fee of 1.059% for federal Direct Subsidized Loans and Direct Unsubsidized Loans and 4.236% for Parent PLUS Loans. This fee isn’t added to your repayment; rather, it’s deducted from your initial loan disbursement.
Private lenders set a range for interest rates. Your actual rate will be based on your and your cosigner’s creditworthiness. As of October 1st, 2020, private student loan annual percentage rates (APRs) are currently:
|Loan Type||Fixed APR||Variable APR|
|Undergraduate||4.49% to 11.93%||2.14% to 11.20%|
|Graduate||5.15% to 11.36%||2.57% to 11.41%|
|Refinance||3.43% to 7.16%||2.67% to 6.85%|
With the announcement that the Federal Reserve will be keeping the federal funds rate close to zero for the foreseeable future, it’s unlikely that private student loan interest rates will increase significantly in 2020.
How Is Student Loan Interest Calculated?
Federal and most private student loans use a simple interest formula to calculate student loan interest. This formula consists of multiplying your outstanding principal balance by the interest rate factor and multiplying that result by the number of days since you made your last payment.
Interest Amount = (Outstanding Principal Balance × Interest Rate Factor) × Number of Days Since Last Payment
The interest rate factor is used to calculate the amount of interest that accrues on your loan. It is determined by dividing your loan’s interest rate by the number of days in the year.
Forbes. "Trump Suspends Student Loan Payments Through December 31." Accessed October 1, 2020.
Forbes. "Fall Enrollments Are Up At Some Large Public Universities." Accessed October 1, 2020.
InsideHigherEd.com. "A Tough Year for Community Colleges." Accessed October 1, 2020.
CBO.gov. "Student Loan Programs—CBO’s Baseline as of March 6, 2020." Page 5. Accessed October 1, 2020.
ConsumerFinance.gov. "2017 Annual report of the CFPB Student Loan Ombudsman." Page 24. Accessed October 1, 2020.
StudentAid.gov. "What are the interest rates for federal student loans?" Accessed October 1, 2020.
FederalReserve.gov. "Federal Reserve issues FOMC statement." Accessed October 1, 2020.