Rising interest rates for new federal student loans
Federal student loan interest rates will increase by almost a percentage point for new loans issued from July 1, 2021 to June 30, 2022.
This represents a 20% to 38% increase in the interest charged on federal student loans over a 10-year repayment period.
Interest rates on federal student loans are reset every July 1, based on the last 10-year treasury bill auction in May, plus a margin of 2.05%, 3.6% or 4 , 6%. The high yield on the May 12, 2021 auction was 1.684%, down from 0.70% the year before.
This gives the following interest rates for new loans made during the 2021-2022 academic year:
- The interest rate on Federal Direct Stafford Loans for undergraduates for 2021-2022 will be 3.734%, compared to 2.75% for 2020-2021, which was a record high.
- The interest rate on Federal Direct Stafford Loans for graduate students for 2021-2022 will be 5.284%, up from 4.3% in 2020-2021.
- The interest rate on Federal Direct Grad PLUS and Federal Direct Parent PLUS loans for 2021-2022 will be 6.284%, compared to 5.3% in 2020-2021.
The new interest rates will cost borrowers up to an additional $ 590 per $ 10,000 borrowed over a 10-year repayment period.
Borrowers cannot borrow federal loans for next year now, until interest rates rise, because the applicable interest rate is based on the date the loan is disbursed.
Despite the rise in interest rates, the new interest rates are still low compared to the interest rates of previous years.
The rate of 3.734% is the fourth lowest interest rate in the past 10 years.
Interest rates on private loans remain low
According to Savingforcollege.com, the best interest rates on a private refinance are 2.58% fixed and 1.61% variable as of May 3, 2021.
Borrowers can refinance federal student loans into private student loans. But, they will lose the current payment break and the interest waiver, which provides a zero percent interest rate at least until September 30, 2021. Borrowers who refinance federal loans will lose other benefits as well, such as deferrals and abstentions for 3 years, income. repayment plans, death and disability leave, and student loan cancellation.
Borrowers who plan to refinance federal loans to private loans may want to wait until the suspension of payment and the interest waiver expire.
On the other hand, there is no reason to wait to refinance private loans if you can qualify for a lower interest rate. There are no prepayment penalties on federal and private student loans.