Federal student loan interest rates are significantly lower than they were before. In fact, borrowers paid 6.80% on direct unsubsidized loans for the 2012-13 school year, which now seems incomprehensible given our low interest rate environment.
For direct subsidized loans and direct unsubsidized loans for undergraduate students due on or after July 1, 2020, but before July 1, 2021, the current rates are set at 2.75%. Meanwhile, graduate students and professional students with direct unsubsidized loans pay 4.30%, while parents and graduate students or professional students with Direct PLUS loans pay 5.30%.
Each year, May brings with it another federal change. student loan rates from July to June next year. The bids were announced in June based on the May Treasury auctions, so we can know right now what the bids will be.
The new rates for direct subsidized loans, direct unsubsidized loans and direct plus loans first disbursed on or after July 1, 2021, but before June 30, 2022, will be as follows:
- Direct Subsidized or Unsubsidized Undergraduate Study Loans: 3.734%
- Direct Unsubsidized Graduate Loans: 5.284%
- Direct loans PLUS: 6,284%
What do these new rates mean for you as a borrower? Maybe nothing, but it depends on the type of your loan and other details of your situation.
What does the rate hike mean for borrowers?
If you already have a federal student loansthen the new rates this year will not affect the student loan interest rate or monthly payment. This is because all federal student loans have a fixed interest rate, which means that your interest rate and monthly payment never change.
You may feel like you will be punished if you combine your federal student loans with the Direct Consolidation Loan, but that won’t bring you a new interest rate either. Why? Direct Consolidation Loans use a weighted average of your existing interest rates to set the new rate, so they will not penalize you in interest if federal student loan rates rise for new borrowers.
Borrowers with federal student loans should also sit still for now, or at least not take any drastic steps. This is because there is a special grace period for federal student loans due to COVID-19 and there are no payments due at least until September 30, 2021. The interest rate is also set at 0% for federal student loans, so you can skip payments without interest.
What about borrowers receiving private student loans?
If you have private student loans, changes in federal student loan rates will not affect your monthly payment or your loan repayment process. This is because private student loan rates are set separately from federal student loan rates, with most pegged to the monthly or 3-month LIBOR or London Interbank Offered Rate. Some private student loan rates are also based on the prime rate.
That being said, borrowers with floating rate private student loans can reap the absolute benefits when interest rates generally fall. When interest rates fall, the monthly variable rate payments fall with them. Of course, the opposite is also true, and an increase in interest rates leads to an increase in monthly payments for the same loan amount.
What is the impact of changes in interest rates
If you are planning on taking federal student loans this year, you can expect to pay a little more due to the higher federal student loan rates. Since all federal student loans have a fixed interest rate, you fix the rate for the entire duration of the loan. Even though they are 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 Service is paid on a per loan basisrather than based on the interest rate on the loan.
Federal student loans also include a number of important consumer protection measures, including the ability to defer or defer, and the ability to repay loans through an income-driven repayment plan.
With that said, there are some situations where it makes sense refinance federal student loans from a private lender – at least after September 30, 2021, when payments will resume and interest will begin to accrue.
For example, it makes sense to refinance federal student loans from a private lender if you have excellent credit and are eligible for a much lower interest rate. This is especially true as lenders such as College Ave offer refinancing loans with a fixed interest rate of 3.34% and a variable rate of up to 3.24%. Just remember that refinancing federal loans from a private lender means giving up options such as income-driven repayment plans, or Public Service Loan Forgiveness (PSLF)…
If you already have private student loans and interest rates are lower than you pay, then it definitely makes sense to consider refinancing. After all, private student loans do not have prepayment penalties like federal loans. This means that you can refinance your private student loan into a new loan with a lower rate without having to pay a penalty. Just remember to keep an eye out and avoid hidden student loan fees that some lenders charge, such as registration fees.
Federal student loan interest rates are subject to change every year, so the change this year is not a surprise. Moreover, changes in the federal student loan interest rate do not affect 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 keep in mind that there are options to keep your existing federal student loan and still receive a lower monthly payment. For example, you can switch from a standard 10-year repayment plan for your loans to a phased repayment plan or an extended repayment plan. You can also choose an income-driven plan such as Pay As You Earn (PAYE), Pay As You Earn (REPAYE), Pay Based On Income (IBR), or Conditional Income Refund (ICR) … These plans allow you to pay a percentage of your discretionary income 20-25 years before forgiveness of any loan balances… If your income is low enough, your monthly payment under an income-based repayment plan can 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 the rates are low enough, or if you have federal loans with higher than average rates (such as Direct PLUS loans), then refinancing federal loans with a private lender can lead to savings of thousands of dollars.