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Federal student loan interest rates drop to historic low

Samantha Fields May 12, 2020
(Saul Loeb/AFP via Getty Images)

If you’ll be taking out student loans for next year, you’re in luck — in one way. Interest rates on federal loans will drop to a record low starting July 1. 

For the 2020-2021 school year, rates will be 2.75% for undergraduate Stafford loans, 4.3% for graduate Stafford loans, and 5.3% for grad PLUS and parent PLUS loans. 

“It is a big drop, and I think it’s a reflection of the cuts to interest rates due to the pandemic,” said Mark Kantrowitz, who publishes the online resource Saving for College. 

The U.S. Department of Education has yet to officially announce the new rates, but they are calculated based on the high yield of the last 10-year Treasury Note auction in May, which took place Tuesday. 

While the new interest rate for undergraduate Stafford loans is not much lower than the previous record, of 2.875%, that was 15 years ago.

“That was actually attributable to 9/11,” Kantrowitz said. “Because after 9/11, the interest rates started going down, down, down, until they hit bottom in 2005.”

Since then, interest rates on federal student loans have been higher, ranging up to 6.8% for Stafford loans and 8.5% for graduate and parent PLUS loans. 

The 2020/2021 rates, Kantrowitz expects, will be “the lowest in a lifetime.”

Though, he added, he thought nothing could cause rates to go lower than they did in 2005, “other than space aliens landing on the White House lawn. That hasn’t happened, but — we have a pandemic.”

While low interest rates will save students and parents money, the cost of college, and the prospect of incurring tens of thousands of dollars in debt, is daunting for a lot of families. That’s true even in a strong economy, but even more so now, with a pandemic, ongoing uncertainty at most colleges and universities about whether the fall semester will be in person or online, Great Depression-era levels of unemployment and one of the toughest job markets in years.

“If you don’t get a job,” Kantrowitz said, “you’re still going to struggle to repay those loans.”

COVID-19 Economy FAQs

Will the federal government extend the extra COVID-19 unemployment benefits?

It’s still unclear. Congress and President Donald Trump are deciding whether to extend the extra $600 a week in unemployment benefits workers are getting because of the pandemic. Labor Secretary Eugene Scalia believes the program should not be extended, and White House economic adviser Larry Kudlow said the additional money is disincentivizing some workers from returning to their jobs. Democrats want to keep providing the money until January.

As states lift restrictions, are people going back to stores and restaurants?

States have relaxed their restrictions, and many of us have relaxed, too. Some people have started to make exceptions for visiting restaurants, if only for outdoor dining. Some are only going to places they trust are being extra cautious. But no one we’ve talked to has really gone back to normal. People just aren’t quite there yet.

Will surges in COVID-19 cases mean a return to lockdowns?

In many areas where businesses are reopening, cases of COVID-19 are trending upwards, causing some to ask if the lockdowns were lifted too soon, and if residents and businesses might have to go through it all again. So, how likely is another lockdown, of some sort? The answer depends on who you ask. Many local officials are now bullish about keeping businesses open to salvage their economies. Health experts, though, are concerned.

You can find answers to more questions here.

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