Student loans and interest rates go hand in hand. Millions of Americans borrow student loans every year to pay for educational pursuits. Approximately 45 million borrowers currently hold over $1.6 trillion in student loan debt .
What does 2020 and beyond have in store for student loan interest rates? That depends on the type of student loan. Federal student loan interest rates are set differently than private student loan interest rates.
Here’s what you should know about what could happen to federal and private student loan interest rates in 2020 and 2021.
Federal Student Loan Interest Rates
Interest rates on federal student loans are set by the government. Each spring, interest rates on federal loans for the coming academic year are set based on the 10-year Treasury note. The rates set for the 2020 to 2021 school year will take effect on July 1, 2020.
Undergraduate students borrowing Direct Subsidized Loans and Direct Unsubsidized Loans will pay a 2.75% interest rate for the 2020 to 2021 school year, down from 4.53% in the 2019 to 2020 school year.
Graduate or professional students borrowing Direct Unsubsidized Loans will pay an interest rate of 4.30% for the 2020 to 2021 school year, down from 6.08% in the 2019 to 2020 school year.
Parents and graduate or professional students borrowing Direct PLUS Loans will receive a 5.30% interest rate for the 2020 to 2021 school year, down from 7.08% in the 2019 to 2020 school year.
Interest rates on federal student loans are fixed for the life of the loan. That means that if you borrowed a Direct Subsidized Loan for the 2019 to 2020 school year, and your interest rate was 4.53%, that interest rate is locked in at 4.53% for the life of that loan.
But, if you qualify to borrow another Direct Subsidized Loan to pay for the 2020 to 2021 school year, your new loan will be disbursed with the 2.75% interest rate.
Since 2006, interest rates on federal student loans have fluctuated from anywhere between 2.75 to 8.50%, depending on the type of loan.
Private Student Loan Interest Rates
Unlike federal student loans, interest rates for private student loans are set based on economic factors and underwriting unique to each lender that issues them. Lenders typically take into account a borrower’s credit history, earning potential, and other personal financial factors.
If you borrowed a private student loan, you might have applied with a cosigner to secure a more competitive interest rate. That’s likely because most college students don’t have much credit history or employment history, so interest rates on private student loans can be higher than those on federal student loans without a well-qualified cosigner.
While federal student loans have a fixed interest rate, private student loans can have either a fixed or variable interest rate. Borrowing a variable rate loan means that the interest rate can change periodically.
The frequency of changes in the interest rate will depend on the terms of the loan and on market factors; typically, private lenders adjust the interest on variable-rate loans monthly, quarterly, or annually. Interest rates on private student loans are typically tied to the London Interbank Offered Rate (LIBOR) or the 10-year Treasury yield.
So as the LIBOR changes, for example, interest rates on variable rate student loans can change as well. Typically, lenders will add a margin to the LIBOR, which is determined based on credit score (and, the credit score of your co-signer if applicable).
Generally, the LIBOR tracks the federal funds rate closely. In June 2020, the Federal Reserve announced that it plans to keep the federal funds rate close to zero, likely through 2022.
This means that, so long as the federal funds rate remains low, the interest rates on private student loans are not likely to increase during that time period. However, it’s important to pay attention to interest rates, especially for borrowers with private student loans with a variable interest rate, since these changes could cause fluctuations to the interest rate of the loan.
And given that LIBOR is scheduled to be discontinued around the end of 2021 , rates could change in other ways as new indices are chosen by lenders.
Can You Lock in a New Interest Rate in 2020?
Worried about interest rate volatility? There are options available that can help prevent an interest rate hike on your variable rate loan. One such option is switching to a fixed-rate loan via student loan refinancing.
When you refinance your student loans, you take out a new loan (typically with a new lender).
The new loan effectively pays off your existing loans, and gives you a new loan with new terms, including a new interest rate. Private lenders, like SoFi, review personal financial factors like your credit and employment history, among other factors, to determine a new interest rate.
If you qualify to refinance, you’re then able to choose between a fixed or variable rate loan, so if you’re worried about rising interest rates in the future, you may have a chance to qualify to lock in a new (hopefully lower) fixed interest rate.
You should also have the opportunity to set a new repayment plan, either extending or shortening the term of the loan. If you extend your student loan repayment term, you’ll likely have lower monthly payments, but will pay more in interest over the life of the loan.
Shortening your repayment plan typically has the opposite effect. You may owe more each month, but will most likely spend less on interest over the life of the loan.
Federal student loans can be refinanced, too. However, refinancing a federal student loan with a private lender means you’ll no longer be eligible for federal programs and protections like income-driven repayment, forbearance, or Public Service Loan Forgiveness (PSLF).
If you are currently taking advantage of one of the federal repayment protections, refinancing may not be the best alternative. To get a general idea of how much refinancing your student loans could impact your repayment, take a look at our student loan refinance calculator, where you can compare your current loan to current SoFi refinance student loan rates.
If you refinance your student loans with SoFi, there are no origination fees or prepayment penalties. The application process can be completed online, and you can find out if you prequalify for a loan, and at what interest rate, in just a few minutes.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.