We love to shed glimmers of light in the midst of the bleak economic downturn. If you are borrowing a Federal Direct Loan for the 2020-21 academic year, you will have the lowest fixed interest rate loan in decades.
How Did It Happen?
The annual interest rates for Federal Direct Loans are based on the May 10-year Treasury note auction. On May 12, 2020, the 10-year Treasury note auction was at .70%. Despite signs that the US economy is starting to reopen, the Bureau of Labor Statistics reported Tuesday that the consumer price index (CPI) experienced the biggest drop since 1957. This was most likely a factor that led to the lowest May 10-year Treasury note auction since the Federal Direct Loans used this index.
How are the Interest Rates Calculated?
The Congressional Budget Office (CBO) will use the 10-year Treasury note to set next year’s Federal Direct Loan fixed interest rates for all loans borrowed between July 1, 2020 and June 30, 2021. Undergraduate students’ Federal Direct Student Loans are calculated based on the May 10-year Treasury rate plus 2.05%, capped at 8.25%. Graduate students’ Federal Direct Student Loans use this same May 10-year rate plus 3.60%, capped at 9.50%. Parents borrowing the Federal Direct Parent PLUS loans will have the rate calculated as the May 10-year Treasury rate plus 4.60%, capped at 10.50%.
What it Means for You?
If you are an undergraduate borrower, your Federal Direct Student Loans will be at 2.75%, down from 4.53%. Graduate borrowers of the Federal Direct Student Loan Program will be at 4.3% which is 1.78% lower than last year. Federal Direct Parent PLUS Loan borrowers will be at 5.30%, down from 7.08%.
How Much Savings Could This Mean?
For parents who defer all payments of their Federal Direct Parent PLUS Loan while their first year bachelor’s degree student is in school, this will be significant. Calculating the difference between last year’s and this year’s interest rates with the average Federal Direct Parent PLUS Loan at $17,220 (reported by College Board), the parent borrowers will save about $3,350. For first year undergraduate students borrowing unsubsidized Federal Direct Student Loans, the savings will be about $1,280 over the life on the loan on the $7,488 average Federal Direct Student Loan.
Is the Only Cost the Interest Rate?
Remember that Federal Direct Loans have loan fees. Every disbursement of Federal Direct Loans deducts loan fees so you receive less funds than you actually borrowed. When the US Budget Control Act of 2011 sought automatic deficit reductions, the US Department of Education was forced to impose loan fees annually. The new loan fee rate will go into effect based on the state of the new federal fiscal year on October 1st. Until September 30, 2020, the loan fee on undergraduate and graduate student Federal Direct Student Loans is 1.059% loan fee. Federal Direct Parent PLUS Loans is 4.236% loan fee which is deducted from each disbursement.
For those who borrow a $5,000 Federal Direct Student Loan before September 30th, the net disbursement is $4,947.05. If you are borrowing a $5,000 Federal Direct Parent PLUS Loan, the net disbursement is $4,788.20 after the loan fees. Although there has been interest creating federal legislation to remove or lower the loan fees, we don’t know if this will happen before the Office of Management and Budget (OMB) sets the 2020-21 loan fee rates.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.