Federal Student Loan Interest Rates Set to Decrease for the First Time in Three Years

ElitePersonalFinance
Last Update: January 17, 2021 College Students Financial News Loans

As the 10-year U.S. Treasury’s yield continues its path downward, Federal student loan interest rates right along. To calculate its Federal Student loan interest rates, the U.S. Department of Education takes the 10-year yield as its baseline. The department then adds an additional interest rate to compensate for its expenses. And for the first time in three years, the math is actually beneficial for borrowers.

Keep in mind that the figures below only apply to new student loans. Prior balances are subject to the interest rates applied when loans were first taken out.

The new 2019/2020 Federal interest rate schedule looks like this:

  • Undergraduate Direct Loans: 4.53%
  • Graduate Direct Loans: 6.08%
  • Graduate and Parent PLUS Loans: 7.08%

Conversely, the 2018/2019 Federal interest rate schedule looked like this:

  • Undergraduate Direct Loans: 5.05%
  • Graduate Direct Loans: 6.60%
  • Graduate and Parent PLUS Loans: 7.60%

Student loan borrowers will save 52 basis points (0.53%) in interest than previous borrowers. For example, a freshman who takes out a $25,000 student loan repaid over 10-years saves $758 in total interest compared to last year’s class.

What Types of Federal Student Loans are Available for Me?

The U.S Department of Education offers three main types of Federal student loans, with the fourth option providing loan consolidation:

  • Direct Subsidized Loans are made to undergraduate students who demonstrate financial need to cover tuition, books, and residency costs.
  • Direct Unsubsidized Loans are made to undergraduate, graduate, and professional students who apply for a student loan but do not demonstrate financial need.
  • Direct PLUS Loans are made to graduate or professional students and parents of dependent undergraduate students to help pay for additional expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required, and those with bad credit must meet additional requirements.
  • Debt Consolidation Loans allow you to combine all of your Federal student loans into a single loan.

How Much Money Can I Borrow with a Federal Student Loan?

Borrowing amounts are determined by your dependency status and your level of study:

  • An undergraduate student can borrow using either a Direct Subsidized or Direct Unsubsidized Loan ranges from $5,500 to $12,500 per year. The eligible amount depends on your year of study and your dependency status.
  • If you’re a graduate or professional student, you borrow up to $20,500 per year in Direct Unsubsidized Loans. Funding for additional expenses can also be obtained through a Direct PLUS Loan.
  • Parents of dependent undergraduate students can also qualify for a Direct PLUS Loan to cover the excess costs not fulfilled by the options above.

What are The Benefits of Taking out a Federal Student Loan?

Beyond just interest savings, Federal student loans have many other attractive features:

  • Interest rates on Federal student loans are fixed and usually less than private student loans.
  • Federal student loans don’t require a co-signer or a credit check.
  • You don’t begin repaying your loan until after you leave college or your enrollment status changes to less than half-time.
  • If you demonstrate significant financial need, the government can pay a portion of your loan interest while you’re in school and after graduating.
  • Flexible repayment plans allow you to postpone your loan payments if you’re having financial trouble.
  • If you work in certain jobs, a portion of your Federal student loan can be forgiven.

How Do Federal Student Loans Differ from Private Student Loans?

Federal student loans are issued by the government, with their terms and conditions set by law. Conversely, banks, credit unions, and state-based lenders are issued private student loans, with their terms and conditions determined by the lender. Federal student loans tend to be cheaper than their private counterparts.

Other differences include:

  • Federal student loans allow you to delay repayment until after you graduate or your enrollment status changes to less than half-time. Conversely, private student loans can require you to make payments while you’re still in school.
  • Federal student loans have fixed interest rates, while private student loans can be fixed or variable.
  • If you demonstrate significant financial need, the government can pay a portion of your loan interest. With a private student loan, you’re responsible for all interest owed.
  • Federal student loans don’t require a co-signer or a credit check. Private student loans can require both.
  • Federal student loans have no prepayment penalties. This can vary with private student loans.
  • Federal student loans can offer loan forgiveness, while private student loans usually don’t offer this feature.
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