Once a year, usually in June, the government announces the interest rates on federal student loans that will first be paid after July 1. Whether you are a freshman or, say, a junior, these rates apply to loans you get for year study that begins in the fall.
For the 2021-2022 academic year, the rates are up almost 1%, compared to 2020-2021. Specifically, for both subsidized and unsubsidized Stafford loans to undergraduate students, the rate is 3.73% (up from 2.75%). For unsubsidized Stafford loans to graduate or professional students, the rate is 5.28% (vs. 4.30%). And for PLUS loans to parents and graduate or professional students, the rate is 6.28% (compared to 5.30%). Perkins loans are set at 5%.
Federal student loan interest rates interest rates for private student loans are determined differently. Here’s what you need to know about federal and private student loan interest rates in 2021.
Federal student loan interest rates for 2021-2022
As we have just noted, interest rate on federal student loans for the upcoming academic year are set by the government. According to federal law, they are based on the auction of 10-year treasury bills in May. The rates set for the 2021 to 2022 school year relate to the first loans disbursed from July 1, 2021 to June 30, 2022.
• Undergraduates borrowing direct subsidized loans and direct unsubsidized loans that are first disbursed for the 2021-2022 school year will pay an interest rate of 3.73%, compared to 2.75% for the school year. school year 2020-2021.
• Graduate or professional students borrowing direct unsubsidized loans starting for the 2021-2021 school year will pay an interest rate of 5.28%, up from 4.30% the previous school year.
• Parents and graduate or professional students borrowing Direct PLUS loans will receive an interest rate of 6.28% for the 2021-2022 school year, compared to 5.30% the previous school year.
How Federal Student Loan Interest Rates Work
The interest rates on federal student loans are fixed for the term of the loan. This means that if you borrowed a direct subsidized loan for the 2020-2021 school year and your interest rate was 2.75%, that interest rate is locked in at 2.75% for the duration of that. ready.
But, if you are eligible to borrow another direct subsidized loan to pay for the 2021-2022 school year, your new loan will be disbursed at the interest rate of 3.73%.
Since 2006, interest rates on federal student loans have fluctuated between 2.75% and 8.50%, depending on the type of loan.
Difference Between Federal and Private Student Loan Interest Rates
Unlike federal student loans, private student loan interest rates are set based on the economics and underwriting of each lender that issues them. Lenders typically take a borrower’s credit history, earning potential, and other personal financial factors into account.
If you have borrowed a private student loan, you may have applied to a co-signer for a more competitive interest rate. This is probably because most students don’t have much credit or employment history, so the interest rates on private student loans may be higher than those on federal student loans without a co-signer. well qualified.
While federal student loans have a fixed interest rate, private student loans can have a fixed or variable interest rate. Borrowing a variable rate loan means that the interest rate can change periodically.
How Private Student Loan Interest Rates Work
The frequency of changes in the interest rate will depend on loan conditions and market factors; Typically, private lenders adjust interest on variable rate loans monthly, quarterly, or annually. Interest rates on private student loans are usually tied to the London Interbank Offered Rate (LIBOR) or the 10-year Treasury yield.
So, as LIBOR changes, for example, the interest rates on variable rate student loans may also change. Typically, lenders will add a margin to LIBOR, which is determined based on the credit rating (and the credit rating of your co-signer, if applicable).
Typically, LIBOR closely tracks the federal funds rate. In June 2020, the Federal Reserve announced its intention to keep the fed funds rate close to zero, possibly until 2022.
This means that, as long as the federal funds rate remains low, interest rates on private student loans are not likely to increase during this period. However, it is important to be careful with interest rates, especially for borrowers with private student loans with variable interest rates, as these changes could cause the loan interest rate to fluctuate.
And since LIBOR should be stopped towards the end of 2021 , rates could change in other ways as new indices are chosen by lenders.
Lower the interest rate of a private variable rate loan
If you have a private variable rate loan and are worried about interest rate volatility, there are options to protect yourself against rising interest rates. One option is to switch to a fixed rate loan by refinancing a student loan.
When you refinance your student loans, you take out a new loan (usually from 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, look at personal financial factors such as your credit and employment history, among other factors, to determine a new interest rate.
If you are eligible for refinancing, then you can choose between a fixed or variable rate loan. Therefore, if you are worried about an increase in interest rates in the future, you may be able to get a new (hopefully lower) fixed interest loan.
Monthly payments and private loans
You should also have the option of setting up a new repayment plan, extending or shortening the term of the loan. If you extend your student loan repayment over time, you will likely have lower monthly payments, but you will pay more interest over the life of the loan.
Shortening your repayment plan usually has the opposite effect. You might owe more each month, but you’ll likely spend less on interest over the life of the loan.
To get a general idea of the impact of refinancing your student loans on your repayment, take a look at SoFi student loan refinance calculator, where you can compare your current loan to SoFi’s current student loan refinance rates.
Refinancing Federal Student Loans
Federal student loans can also be refinanced. Typically, a student would not do this while in school because the government pays interest on some federal loans during this time. In addition, the interest rates on federal student loans are generally lower than the rates on private loans disbursed during the same period.
It should be noted, however, that refinancing a federal student loan from a private lender means that you will no longer be eligible for federal programs and protections such as income-tested repayment, forbearance or Public Service Loan Discount (PSLF).
Federal student loan interest rates are reset every June for the upcoming school year. For the 2021-2022 school year, rates are up about 1% from the previous year, which had seen the lowest rates in years.
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 are prequalifying for a loan, and at what interest rate, in just a few minutes.