How To Look At Low Student Interest Rates

Monday, June 29, 2020

2.75% is the new federal direct student loan rate for undergraduate college students in the U.S.

The new federal direct student loan interest rate for undergraduate college students who want to take out federal student loans dropped to 2.75% for the 2020-2021 academic school year. This is quite the historic low, especially when considering that last year’s student loan interest rate was 4.53% last year.

The new interest rate was announced in May of last year. The interest rate is a historical low. It will take effect on July 1 for direct subsidized and unsubsidized student loans.

The new low interest rate presents a unique opportunity for students who want to take out student loans.

Undergraduate loan rates are not the only rates that have been cut. The new interest rate for graduate students taking out federal direct unsubsidized loans will go down from 6.08% for 2019-2020 to 4.53% for 2020-2021.

The interest rate for federal direct PLUS loans, which includes Graduate PLUS and Parent PLUS loans, will go down from 7.08% to 5.3%.

The new lowered interest rates do not apply to private student loans or existing federal student loans. However, they do remain fixed for the life of the loan.

The sudden drop in student loan rates are likely related to the economic downturn and unemployment crisis triggered by the global coronavirus pandemic.

Rates are usually announced around this time. Congress sets them at a certain percentage above the base rate.

Currently enrolled students or students who are beginning college this fall could consider taking out student loans, even if they weren’t necessarily planning to right now.

Brenda Hicks, a director of financial ad at Southerwestern College, shares, “It’s a good year to borrow. In my opinion, it’s a smart opinion this year, and that might result in people who don’t normally borrow or people who have invested and saved joining in.”

A family that saves diligently and has enough funds saved up to pay for college, for example, could decide to take out undergraduate student loans under the low interest rate to avoid selling investments when the stock market, as it is right now. Taking out student loans may allow the family to wait for the economy and stock market to recover fully before selling those investments.

As many file for unemployment and experience pay cuts and furloughs from the economy that has been in a downturn due to COVID-19, there are many families that can expect themselves to be in a worse financial position this fall.

Cody Hounaian, the program director for the nonprofit advocacy group Student Debt Crisis, says the low federal student loan interest rates are good news but their tangible impact on borrowers will be limited.

Hounaian shares, “New student loan borrowers are going to have the lowest rate in history, but it couldn’t have come at a worse time. We’re going to have fewer people enrolling in school and more people taking gap years or dropping out. These rates do absolutely nothing for those borrowers. There is no federal student loan refinancing option… This is a great reminder of why we need that option, because with many borrowers paying over 6% and higher, they could refinance into this historically low interest rate, and that would be hugely beneficial.”

Existing borrowers will face their challenges. Nearly 33% of federal student loan borrowers were struggling to afford payments before COVID-19. 46% expect to struggle in six months after federal relief that temporarily paused payments ends.

While there is no federal option, borrowers holding federal student loans refinance loans into a private loan to get a lower interest rate. Experts issue notes of caution when considering this option.

No matter what, students and their families should always exercise caution and plan meticulously before taking out loans. It is imperative that students borrow smart and stay educated on options.

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