Students who are borrowing money to cover some of the college tab this fall have reason to be in a good mood.
For the first time in three years, the interest rates on new federal students loans are set to drop starting July 1. The new fixed interest rates are dropping by more than half a percentage point from a year ago.
And while about 90% of college borrowers rely on Uncle Sam, students who are applying to banks, credit unions and other private lenders will find more attractive rates as well, though the best rates will require excellent credit.
For that and other reasons, federal student loans are the best option for most borrowers. In May, the government announced that the new interest rate will be 4.529% on Stafford loans for undergraduate students, and 7.079% for federal Parent PLUS loans.
For graduate students, the new fixed rate on Stafford loans will be 6.079 and 7.079 on Grad PLUS loans.
The new rates also apply to incoming freshmen who accepted financial aid packages early this year. That’s because the rate is based on the date the loan is disbursed. So, if the loan is disbursed from July 1 to June 30, 2020, the rate on the federal Stafford loan will be 4.529% for an undergraduate student.
The new interest rates do not affect existing loans, only new loans.
The decline in the interest rates will decrease the monthly loan payments after students leave school by about 2.4 percent, assuming the payback period is 10 years, according to an analysis by Mark Kantrowitz of SavingforCollege.com.
For most borrowers, he noted, the decrease will amount to just a few dollars a month, but that adds up to several hundred over the life of the loan. (Online student loan calculators will show how the new rates affect your loan.)
While rates on federal education loans are fixed and remain the same over the life of the loan, each year’s new loans have a new interest rate. The new rates are tied to the 10-year Treasury note auction in May, which yielded 2.479%, down from 2.995% the previous year.
Unlike interest rates, the fees on federal loans are based on a federal fiscal year cycle. New fees will start on Oct. 1.
Private student loans have been hovering around 5.07% to 15.15% on fixed rates, and 4.07% to 13.25% on variable-rate loans. Since most students have little or no credit history, they’ll need to rely on a parent or other co-signer who does have a strong credit score to qualify for the best rates.
However, private loans don’t come with the same features of federal loans, namely income-driven repayment plans, and loan forgiveness policies. Keep that in mind if you’re still searching for money to cover college bills.