Some good news for college borrowers: loan rates are at an all-time low
Federal interest on student loans has just fallen to its lowest rate on record.
The interest rate for undergraduate student loans paid after July 1 is 2.75%. This is a drop of almost 40% from last year’s rate for 2019-20 loans, which was 4.53%. Graduate and PLUS loan interest rates are also at record highs: 4.30% and 5.30%, respectively.
A lower interest rate means that student borrowers this year will pay less for these loans overall. Here’s how paying off the loan at last year’s rate compares to paying off at this year’s rate:
For $ 5,500 in undergraduate loans – the maximum a freshman can borrow – disbursed last year at 4.53%, the monthly payment is $ 57, with $ 1,350 in interest on the loan. typical 10-year loan term. That same loan disbursed today costs $ 52 per month and $ 797 in lifetime interest. That’s $ 553 in savings.
Be sure to read: Should you be going to college next fall? Before you decide, here are all the questions you should NOT be afraid to ask
The lower rates offer even greater savings potential to graduate and PLUS loan borrowers, who may borrow much larger amounts.
For $ 20,500 in graduate loans at last year’s rate – 6.08% – monthly payments are $ 228 and total interest charges are $ 6,910. This year, that loan is costing $ 210 per month, with $ 4,759 in interest, which is essentially a rebate of $ 2,151.
Existing loans do not benefit from the new low rate
The lower interest rate only applies to new loans. Jan Miller, president of Miller Student Loan Consulting LLC, says many borrowers mistakenly assume that their existing loans adjust to the latest rate every year.
Student loan interest rates are set based on the year the loan was granted. Thus, only undergraduate loans taken out for the 2020-21 academic year will have a rate of 2.75%. Existing loans will retain the rate associated with the year of disbursement.
Student loans for the 2020-21 school year are not affected by student loan relief measures described in the coronavirus relief package.
Private loans are also cheaper
Interest rates on private student loans also tend to fall. Unlike federal student loan rates, private loan rates depend on the creditworthiness of the borrower and can vary widely from lender to lender. For the best qualified borrowers, many lenders now offer rates close to 1%.
Also see: Harvard and other elite schools say classes will be mostly distant this fall
Many interest rates for student loan refinancing also fell. Graduates can take advantage of low refinancing rates to reduce interest and payments on existing debt. They will typically need a credit score in the range of 600, a low debt-to-income ratio – less than 50% – and a stable income to qualify.
While lower rates make it a good time to refinance private student loans, don’t refinance federal student loan debt just yet. All federal student loans are subject to interest-free administrative forbearance until September 30, 2020.
Borrow only what you need
Don’t overborrow just because the rates are low. Base borrowing on college costs and expected future benefits.
Stephanie Hancock, Certified Financial Planner and Owner of College Aid Consulting, advises borrowers to be aware of the current economic uncertainty, which has contributed to lower rates. “In this environment, do people want to get into more debt? she asks.
Read more : Why student debt is a racial justice issue
Miller also cautions against student loans if they weren’t previously in a student’s financial strategy.
“I hope people don’t change their plans based on the rates,” he says. “Debt is a great instrument, but it should be a last resort in many ways. “