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Federal student loan interest rates are considerably lower than they used to be. In fact, borrowers paid 6.80% on Direct Unsubsidized loans for the 2012-13 school year, which seems unfathomable right now considering our low-rate environment.
For Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate students disbursed on or after July 1, 2020, and before July 1, 2021, current rates are set at 2.75%. Meanwhile, graduate and professional students with Direct Unsubsidized Loans are paying 4.30%, and parents and graduate or professional students with Direct PLUS loans are paying 5.30%.
Every year, May brings along another change to federal student loan rates for July through June the following year. The rates are announced in June based on the May Treasury auctions, so we can know right now what the rates will be.
The new rates for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2021, and before June 30, 2022 will be as follows:
- Direct Subsidized or Unsubsidized Undergraduate Loans: 3.734%
- Direct Unsubsidized Graduate Loans: 5.284%
- Direct PLUS Loans: 6.284%
What do these new rates mean for you as a borrower? Maybe nothing, but it depends on the type of loans you have and other details of your situation.
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What Do Rate Increases Mean For Borrowers?
If you already have federal student loans, then this year’s new rates will not impact your student loan interest rate or monthly payment. That’s because federal student loans all come with a fixed interest rate, which means your interest rate and monthly payment never change.
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You may feel like you will be punished if you consolidate your federal student loans with a Direct Consolidation Loan, but that won’t get you a new interest rate, either. Why? Direct Consolidation Loans use the weighted average of your existing interest rates to set your new rate, so they won’t penalize you in interest if federal student loan rates rise for new borrowers.
Borrowers with federal student loans should also just sit pretty for now, or at least not make any drastic moves. That’s because the special forbearance period is in place for federal student loans due to COVID-19, and there are no payments due until at least September 30, 2021. Interest is also set at 0% for federally-held student loans, so you can skip payments without any interest accruing.
What About Borrowers With Private Student Loans?
If you have private student loans, changes to federal student loan rates won’t impact your monthly payment or loan repayment process. That’s because private student loan rates are determined separately from rates on federal student loans, with most of them pegged to the one-month or three-month LIBOR index, or the London Interbank Offered Rate. Some private student loan rates are also based on the Prime rate.
With that being said, borrowers with private student loans that have variable rates can absolutely benefit when interest rates drop overall. When interest rates drop, monthly payments on variable rates drop right along with them. Of course, the opposite is also true, and rising interest rates lead to higher monthly payments on the same loan amount.
What’s The Impact Of Interest Rate Changes
If you are someone who is planning to take out federal student loans this year, then you can expected to pay slightly more due to the higher federal student loan rates. Since federal student loans all come with fixed interest rates, you lock in a rate for the life of your loan. Even with them being slightly higher, they are still very low.
And don’t fall for the myth that higher rates mean your loan servicing company is making more money on interest. Federal loan servicers are paid per-loan, not based on the interest rate charged on the loan.
Federal student loans also come with an array of important consumer protections, including the chance for deferment or forbearance, as well as the option to repay your loans with an income-driven repayment plan.
With that being said, there are some situations where it could make sense to refinance federal student loans with a private lender — at least after September 30, 2021 when payments resume and interest begins accruing.
For example, it can make sense to refinance federal student loans with a private lender if you have excellent credit and you’re eligible for a much lower interest rate. This is especially true since lenders like College Ave are offering refinance loans with fixed interest rates as low as 3.34% and variable rates as low as 3.24%. Just remember that refinancing federal loans with a private lender means giving up options like income-driven repayment plans or Public Service Loan Forgiveness (PSLF).
If you already have private student loans and interest rates drop lower than what you’re paying, then it definitely makes sense to look into refinancing. After all, private student loans do not have prepayment penalties, just like federal loans. This means you can refinance your private student loan into a new loan with a lower rate without having to pay a penalty for doing so. Just make sure to watch out for and avoid hidden student loan fees some lenders charge, like origination fees.
The Bottom Line
Federal student loan interest rates have the potential to change every year, so this year’s movement doesn’t come as a surprise. Not only that, but federal student loan interest rate changes don’t impact existing borrowers. If you already have federal student loans, your rate is currently fixed and will never change unless you take steps to refinance your loans.
Also be aware that there are options that let you keep the federal student loan you have and still get a lower monthly payment. For example, you could switch from a standard 10-year repayment plan on your loans to a graduated repayment plan or an extended repayment plan. You could also select an income-driven plan like Pay As You Earn (PAYE), Revised Pay As You earn (REPAYE), Income Based Repayment (IBR), or Income Contingent Repayment (ICR). These plans let you pay a percentage of your discretionary income for 20 to 25 years before forgiving any remaining loan balances. If your income is low enough, the monthly payment on an income-driven repayment plan could be as low as $0.
As a side note, it still makes sense to pay attention to interest rates on private student loans, including how they change over time. If rates are low enough, or if you have federal loans with higher than-average rates (like Direct PLUS loans), then refinancing federal loans with a private lender could lead to thousands of dollars of savings.
