High school grads on their way to college — as well as returning college students — just got a bit of a financial gift.
Interest rates on new federal student loans made on or after July 1 will be lower than they are now. It’s the first rate cut in three years.
Rates will decrease by 0.516 percentage points for new federal student loans made on or after July 1 through June 30, 2020.
The new fixed interest rates will be 4.529 percent on the Federal Stafford loan for undergraduate students.
The rate is 6.079 percent for the Federal Stafford loan for graduate students and 7.079 percent for the Federal Grad PLUS and Federal Parent PLUS loans.
It’s not a huge savings but it’s real money.
The lower rates would drive the monthly loan payments down by about 2.4 percent, assuming a 10-year repayment term, according to Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
“For most borrowers,” he said, “that yields a decrease of just a few dollars a month.”
“The typical borrower will save $2 to $3 a month or about $300 in total, assuming a 10-year repayment plan,” Kantrowitz said.
The new rates do not apply to existing loans. The new rates do not apply to private student loans; the interest rates on private student loans typically change monthly, even for fixed interest rates, Kantrowitz said.
Kantrowitz noted that the interest rates on federal education loans are fixed, which means they remain the same during the life of the loan.
Each year’s new federal students loans have a new interest rate, which is based on the high yield of the last 10-year Treasury Note auction in May.
Through time, of course, students can save a good deal of money with lower rates. The average savings on federal student loans taken out during the 2019-20 academic year will range from $199 for undergraduates to $805 for graduate students taking out PLUS loans, according to Credible.com.
The $199 estimate is based on loans taken out in 2019-20, based on average annual borrowing of $6,570 for undergraduate students. The estimated $805 in savings for graduate students is based on average annual borrowing of $24,810.
To save more money, of course, students need to continue to watch how much money they’re borrowing.
Kantrowitz offers these tips:
- Remember, every dollar you borrow will cost about $2 by the time you repay the debt, given the typical mix of repayment plans and capitalization of interest that accrues during the in-school period.
- “Every dollar you save is a dollar less you’ll have to borrow,” he said. He noted that the new rate is 4.529 percent — so it should remind families about the benefits of putting money in college-related, tax-advantaged 529 savings plans.
- Some private student loans will reduce the interest rate on your private student loans if you agree to make interest-only or fixed payments, say $25 per month, during the in-school and grace periods.
- Paying on federal and private student loans while in college can reduce the interest that is capitalized. But, there’s a trade-off between paying the interest during the in-school period and borrowing less in subsequent years. Would you be able to save more to take on less debt next year in school?
- You can save money on both federal and private student loans by agreeing to repay your student loans by auto-debit, where the monthly payment is automatically transferred from your bank account to the lender. Most lenders will reduce your interest rate by 0.25 percent or 0.50 percent.