Student loan rate increases are a daunting possibility when you’re facing taking out more loans every year. But unfortunately, student loan interest increases can be par for the course.
Thankfully, we have some good news: Federal student loan interest rates are down for the 2019–2020 school year. After two years of increasing rates, you’ve finally caught a break this year.
That doesn’t necessarily mean rates will stay low. It’s possible that rates will continue to decrease over the next couple years, but rates could also increase.
If you’re worried about an upcoming student loan rate increase, and wondering if the federal government might be raising student loan interest rates in the coming years, read on for more information.
There’s no way to know for sure what will happen with student loan interest rates, but it could help to know the landscape, understand how the rates have gone up in the past, and look at what’s being proposed for the future. The more you know, the more prepared you can be when it’s time to take out another loan.
Student Loan Interest Rates Change Annually
Under a law adopted by Congress in 1993, the federal government pegged federal student loan interest rates to the longer-term U.S. Treasury rates, and adjusts those interest rates annually for new federal student loans.
Each year, the new rates take effect on July 1 and apply to federal student loans taken out for the following academic year. Rates had increased from the 2017–2018 to the 2018–2019 school years, but have decreased for 2019–2020 and the 2020-2021 school years.
Student Loan Rates for the 2020–2021 School Year
The interest rates on Direct Subsidized and Unsubsidized Student Loans for undergraduates are 2.75% 2020-2021 academic year for any new loans made on or after July 1, 2020, and before July 1, 2021.
Student loan interest rates also decreased for Graduate or Professional Direct Unsubsidized Student Loans—dropping to 4.30%. Rates on Direct PLUS Loans, which are available to parents and graduate students, decreased to 5.30%.
In an effort to keep the interest rates on federal student loans from skyrocketing, Congress has set limits on how high-interest rates can go. Undergraduate loans are capped at 8.25%, graduate loans can’t go higher than 9.5%, and the limit on parental loans is capped at 10.5%.
If Your Loan Has a Variable Interest Rate, a Hike Could Be in the Cards
If you take out a new federal student loan, the loan’s interest rate is fixed. This means the interest rate stays the same over the life of the loan.
When you borrow a private student loan or refinance an existing loan, you can typically choose between a fixed and variable interest rate. If you take out a loan with a variable rate, the interest rate could fluctuate depending on market volatility.
When you take out a private student loan, the original rate depends on your credit score, employment history, and current income level—among other factors, which vary by lender.
If your loan has a variable rate, the rate you pay fluctuates as the economy changes. You might have mixed feelings when rates alter. Generally, rates tend to decrease when the economy takes a hit, and they tend to increase as the economy strengthens.
How do you know if a rate hike is in the cards? We can never be 100% sure, but it might help to look at trends in the market. You could consider looking at the London Interbank Offered Rate (LIBOR) , an interest rate index that is updated daily and shows how rates change along with the economy.
If you look at the LIBOR index in 2019, you can see that variable rates were steadily increasing from 2014 to January 2019, but they’ve been decreasing ever since.
Tuition and Fees Are No Longer Tax Deductible
The 2018 Tax Cuts and Jobs Act did not include an extension of the Tuition and Fees Deduction. In the past, taxpayers could use this tax provision to reduce their taxable income by up to $4,000 annually. The IRS currently has no plans to make tuition and fees deductible again in the future.
The Student Loan Interest Deduction May Be Eliminated
The Tax Cuts and Jobs Act originally proposed eliminating the student loan interest deduction, which allows you to deduct up to $2,500 annually on the interest you pay on a student loan. Ultimately, this deduction wasn’t eliminated and is still available, but it’s an issue to be aware of.
Refinancing Your Student Loans With SoFi
One way to navigate all these changes is to refinance your student loans with SoFi, allowing you to choose a monthly payment plan and loan term that works for you. Certain private lenders only refinance private student loans, but SoFi gives you the option to refinance both private and federal loans.
Refinancing your student loans involves taking out a brand new loan with a new interest rate. By refinancing, you have the opportunity to make only one monthly payment instead of balancing multiple payments. If your financial situation has improved since you took out your original loans, you might qualify for a lower interest rate.
If you’re currently enrolled in an income-driven repayment plan or are working toward loan forgiveness for your federal loans, refinancing might not be the best option for you because you lose access to federal loan benefits when you refinance.
But if you’re worried about rising variable rates on private student loans or are interested in seeing if you qualify for a new interest rate, now may be the time to look into refinancing.
When you refinance with SoFi, there are no origination fees or prepayment penalties. Take a look at SoFi’s student loan refinancing calculator to get an idea of what a new loan could look like for you.
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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.