Federal Student Loan Rate Drop: Lowest in History for 2020-21 Academic Year

Federal-Student-Loan-Rate-Drop-2020-2021

The federal student loan interest rate will feature a shocking drop for the upcoming academic year.

The new federal college loan rate will be set at 2.75% — a significantly lower number than 2019’s rate of 4.53%. A rate anywhere near this good hasn’t been offered in the last 15 years.

The record-low rate will take effect this summer and be available on undergrad federal student loans borrowed for the following fall and spring semesters.

This will be a welcome sight for families who need help from the government to afford tuition, especially in the midst of coronavirus and its economic impact across the country.

Here’s what this new interest rate means for prospective college students, and how it can provide a much-needed financial break to families during the 2020-21 school year.

How was this federal student loan rate determined?

Every year, Congress decides the updated interest rates offered on federal student loans. These rates are set each spring and are based in part on the sale of 10-year Treasury notes auctioned in May.

The refreshed rate for 2020-21 will begin on July 1 for new undergrad loans borrowed from the government and will remain fixed for the life of the loans.

Which federal loans will have this new low rate?

Undergraduate Federal Direct Stafford student loans will include the new record-low rate of 2.75%.

However, other types of federal loans will also drop to better rates — just not to historic levels:

  • Graduate Federal Direct Stafford loans will decrease to 4.30% from 6.08% in 2019
  • Federal Direct PLUS loans — including Parent PLUS and Grad PLUS loans — will fall to 5.30% from 7.08% in 2019.

How does a lower interest rate help your finances?

A lower interest rate will ultimately save you money on your loan. While you’ll see some savings on each monthly payment, the impact of a more favorable rate can really be felt over the life of a loan.

For example: If you plan to pay back your federal student loans on a standard 10-year plan, you can expect to save around $1,000 in interest costs for every $10,000 borrowed with this year’s 2.75% rate compared to last year’s 4.53% rate.

How do you apply for federal student loans?

Federal student loans are issued by the government — the U.S. Department of Education to be exact. And these loans are offered to students and families based primarily on financial need.

To find out how much federal student loan support you can qualify for, you must fill out and submit the Free Application for Federal Student Aid (or FAFSA). After grants, scholarships, and other financial aid is awarded, the government will calculate how much you’re eligible to receive in federal loans.

From there, you can apply for the amount of federal student loans you’d like based on your personal financial needs.

Federal student loans vs. private student loans

While federal loans are issued by the U.S Department of Education, private student loans are offered by banks, credit unions, and other private financial institutions.

The federal loan rates set by Congress are typically lower than private loans, which can vary from lender to lender and borrower to borrower.

Private loan rates are determined primarily by an applicant’s creditworthiness as well as other factors like income and type of degree. Since credit plays such a large role, many students need a cosigner (like a parent or relative) with a good credit score in order to qualify for a private loan.

Although federal loans usually have better rates, some students may not qualify for enough money to fully cover tuition. That’s where private student loans can come into play.

If you still need help filling in any funding gaps after calculating your other federal financial aid, private loans can be a smart and effective solution. But since each private lender is different, it’s essential to shop around for the best rates before applying.

Use Purefy’s Compare Rates tool to see which rates you can qualify for from different lenders so you can make an informed decision.

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