Federal student loans will be cheaper than ever

(CNN) — Students taking on federal student loans this year will benefit from the lowest interest rates in history.

This offers some consolation to families who are struggling financially due to the coronavirus pandemic and facing the daunting cost of a higher education.

“The rates for federal student loans have never fallen this far or this fast,” said Robert Humann, general manager of Credible, a credit comparison site. “That is good news at a time when people are acutely aware of their financial situation.”

Undergraduates can expect a 2.75% interest rate on a Federal Direct Stafford loan this academic year, down from 4.53% during the past school year. Federal graduate loans will have a 4.3% rate, down from 6.08%, and federal PLUS loans (for graduate and parent borrowers) will be at 5.3%, down from 7.08%.

With the new rates, the average total savings on interest charges will range from $669 for undergraduates to $2,797 for graduate students taking out larger federal PLUS loans at higher rates, based on a 10-year term, according to Credible.

Rates for new borrowers are set once a year through a formula tying interest rates on federal student loans to yields on 10-year Treasury notes auctioned each May. The lower rates result from falling bond yields that mean the government can borrow money more cheaply, a savings that is passed on to borrowing students and their families.

Impact of new rates

No one was predicting the economic impact of the pandemic would cause interest rates to go so low, said Mark Kantrowitz, a financial aid and student loan expert and publisher of Savingforcollege.com.

But, he cautions, the 40% drop in rates from last year on undergraduate loans, does not mean that your monthly payments will drop by that much, too.

“Families have a tendency to overemphasize the impact of interest rates on their monthly payment,” said Kantrowitz.

“The savings [on undergraduate loans] is about $1,000 in interest per $10,000 borrowed in a 10-year term,” he said. “That’s about $100 in interest per year.”

The new rates apply only for new loans taken out for this academic year, between July 1, 2020 and July 1, 2021, not existing loans. Current loan holders aren’t allowed to refinance old federal student loans to take advantage of the new interest rates.

While those who have existing higher interest rate loans could refinance their federal loans into private student loans, they need to be aware they will lose federal student loan benefits, like deferments and forbearance, and income-driven repayment and loan forgiveness options.

Currently, for example, as a result of the CARES Act, the government has temporarily reduced interest rates on federal student loans owned by the government to 0% through September 30 to provide relief due to financial hardship because of the coronavirus.

Uncertainty about the fall semester

At the moment, the interest rate on federal student loans may be one of the most certain things about college. No doubt, people’s financial situations are changing rapidly.

“With 33 million people losing their jobs, that is likely a few million parents of college students that will be appealing for financial aid because their income has changed,” said Kantrowitz.

What are struggling families and student borrowers to do?

If you are experiencing a financial hardship, he says, reach out to your college or university.

“Tell them about any financial difficulty,” he said. “And tell your lender.”

You may need to file an appeal to your Free Application for Federal Student Aid (FAFSA) on the basis of an income change and provide evidence of employment loss.

Colleges are getting so squeezed, he said, it is in their interest to work with you on finding additional aid because a student paying something is better than fewer students.

“If they have already admitted you, they will not revoke your acceptance based on your need,” said Kantrowitz. “They may not have additional aid for you, but they won’t change your admission status.”

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