If you're in the mood for some good news, we actually have some for you! Interest rates on federal student loans are set to reach historic lows for the 2020-2021 school year, with undergrad loan rates set at 2.75%, down from 4.53%.
What that means to you: If you were planning on using federal student loans for school next year, you just received a discount for the total cost of your college education.
Rates good for 2020-2021 school year only
The new rates apply only to federal student loans taken out after July 1, 2020 and before July 1, 2021. These record-low rates present an excellent opportunity to advance your education at a substantially lower cost.
Will the rates be offered again for the 2021-2022 school year? It's not impossible but it's extremely unlikely. Federal student loan rates are recalculated every year. The last time rates were anywhere near the new rate of 2.75% was back in 2008, when the fixed rate was 2.875%.
Which loans are impacted?
There are several different federal loans that will be impacted by the rate change.
Undergraduate federal loans, also called Direct Loans or Stafford Loans, will have a fixed interest rate of 2.75%, down from 4.53%. That rate will apply to both subsidized and unsubsidized loans.
Federal Direct Stafford Loans for grad students will be set at 4.3% for unsubsidized loans, down from 6.079%.
Direct PLUS Loans, offered to grad students and parents, will be set at 5.3%, down from 7.079%.
How much can you save?
A lower interest rate means that, ultimately, you'll pay less over the life of your loan.
Let's assume that you're a college freshman entering college in the fall of 2020. You are taking the maximum federal loan amount for first-year students of $5,500 in an unsubsidized loan. At the current rate of 4.53% for the 2019-2020 school year, you'd pay $1,349.71 in interest over the life of the loan. At the new interest rate of 2.75%, you'll pay $797.06 in interest over the life of the loan. That's a savings of $552.
Sophomores, juniors, and seniors will save even more. Federal loan limits increase to $6,500 in the second year of school and $7,500 in the third and subsequent years.
What it means for the fall
If you're still undecided about your fall plans, this rate reduction should now factor into your decision-making process if you were planning on using federal loans. A few things to consider:
1. Taking a gap year means you'll miss out
As we mentioned above, federal student loan rates are recalculated every year and rates are likely to increase for the 2021-2022 school year.
If you were considering taking a gap year, you're very likely to miss out on the lowest interest rates that will ever be available to you. You should also keep in mind that the job market is not predicted to recover by the fall and travel is likely to be limited, so your normal gap-year options may not be available.
2. This could help tip the scales toward your Plan A or Plan B school
Many graduating seniors are wrestling with school decisions for the fall semester: Proceed with your school of choice and hope that campuses will be open? Or assume distance learning will be in effect and look into lower-priced options? Of course, there are no clear-cut answers and everyone's situation is different. The interest rate drop could be a deciding factor.
Keep in mind that enrollment is likely to surge in 2021. If you have a secure place at your school of choice this fall, it's wise to do some soul searching about whether it's worth changing your plans due to a temporary setback. Of course, that's assuming that you've already narrowed down your choices to schools that were affordable to you AND that you've done everything you can to maximize your financial aid and scholarship awards.
If you're planning on enrolling at a community college, these rates present an especially good value. Most community colleges have a total yearly cost of attendance ranging between $3,000 and $6,000. If you're a first- or second-year student, you may be able to fund your entire education for the year while still staying below federal student loan yearly limits.
If you still have tuition gaps
Remember to look at college as an investment in your future rather than an expense. If you're unable to fully fund your education through savings, financial aid, and federal student loans, private student loans can help fill in tuition gaps. See our recommendations for the best private student loans of 2020.