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.
The interest rate for undergraduate federal Stafford loans issued between July 1, 2020, and June 30, 2021, is 2.75%—down from 4.53% the previous year.
- All federal student loans are currently 0% interest and require no payments through September 30, 2021.
- 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 loan rates are 4.30%, and Parent PLUS loan rates 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. economic expansion since World War II, and it may take several years before the economy gets back on track. In the education system, it’s caused uncertainty for students looking to start or continue their degrees and given rise to questions about new and existing student loans. Circumstances continue to change abruptly, but some of those questions can be answered.
Student Loan Debt Relief Options
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which set interest on federal student loans at 0% on March 20, 2020, is currently extended through Sept. 30, 2021, and borrowers have automatically been placed in an administrative forbearance, allowing them to temporarily stop making monthly loan payments, also through Sept. 30, 2021.
All months of payment suspension will count as “qualifying payments” for borrowers working toward forgiveness under the Public Service Loan Forgiveness (PSLF) program or on an income-driven repayment (IDR) plan.
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
In fall 2020, colleges and universities opened their classrooms and dorm rooms again, with early trends (both expected and unexpected). Within the first few weeks of resuming classes, as expected, many schools had postponed sports, reported widespread quarantines, and switched in-person classes to virtual. Less expected were the trends with enrollment. Many thought that community colleges would see the higher enrollment during the pandemic, but early data showed that fall enrollment was up for some large public universities while enrollment at community colleges that serve many low-income students was down as much as 30%.
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.
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 cosigner’s creditworthiness. Most private lenders also offer a variable interest rate, which typically fluctuates monthly or quarterly with the London Interbank Offered Rate (LIBOR).
While federal student loans don’t take into account credit scores and income, these factors play a big role in private lenders’ decisions. Students who don’t meet lenders’ credit requirements will need a cosigner. 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 cosigner. However, even if you don’t have a good credit score or cosigner, 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 1.057% for federal Direct Subsidized Loans and Direct Unsubsidized Loans, and 4.228% 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 the creditworthiness of you and your cosigner. According to Bankrate, private student loan annual percentage rates (APRs) are currently:
|Loan Type||Fixed APR||Variable APR|
|3.34% to 12.99%||1.04% to 11.98%|
|Refinance||2.59% to 7.63%||1.90% to 6.86%|
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 2021.
How Is Student Loan Interest Calculated?
Federal student loans 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.
U.S. Department of Education: Federal Student Aid. "Federal Interest Rates and Fees." Accessed March 30, 2021.
U.S. Department of Education: Federal Student Aid. "Coronavirus and Forbearance Info for Students, Borrowers, and Parents." Accessed March 30, 2021.
InsideHigherEd.com. "A Tough Year for Community Colleges." Accessed March 30, 2021.
Federal Reserve Bank of St. Louis. "Rising Student Debt and the Great Recession." Accessed March 30, 2021.
CBO.gov. "Student Loan Programs—CBO’s Baseline as of March 6, 2020." Page 5. Accessed March 23, 2021.
ConsumerFinance.gov. "2017 Annual report of the CFPB Student Loan Ombudsman." Page 24. Accessed March 23, 2021.
Bankrate. "Student Loan Interest Rates in March 2021." Accessed March 24, 2021.
FederalReserve.gov. "Federal Reserve issues FOMC statement." Accessed March 30, 2021.