The coronavirus crisis has thrown higher education into turmoil, with many colleges not sure whether they'll be reopening their campuses for the fall or conducting classes entirely online, remotely.
But here's welcome news for students and their families that we know for certain: For the upcoming academic year, the interest rates on federal student loans will be fixed at the lowest levels in history.
The deeply reduced rates that became available this month will cut the typical monthly student loan payment by about 8%, according to one expert.
It's another odd "benefit" of the COVID-19 pandemic, similar to today's unbelievably cheap rates on home mortgages.
Dwindling interest rates might help cut the cost of existing college debt, too, if you're already paying off student loans.
Just how low are the rates on federal student loans?
The new rates are based on the interest on new 10-year Treasury notes that were auctioned in May. Treasury yields have been crashing due to the Federal Reserve's drastic interest rate cuts and investors' worries about the coronavirus and the economy.
So just how low are the new student loan rates? They've dropped by nearly 2 full percentage points across the board for the 2020-2021 academic year.
The new rate on Federal Direct Stafford loans for undergraduate students is 2.75%, down from 4.53%.
The new rate on Federal Direct Stafford loans for graduate students is 4.3%, down from 6.08%.
The new rate on Federal Direct PLUS loans is 5.3%, down from 7.08%. Those loans are used by parents of undergrads, and by graduate and professional school students.
The rates offered as of July 1 shatter records set in 2005, when the interest on federal student loans was as low as 2.88%, says Mark Kantrowitz, a student loans expert and publisher of Savingforcollege.com.
At the new rates, monthly student loan payments will fall by 8.1%, which Kantrowitz says will save borrowers a sweet $100 in interest per year and about $1,004 in total interest for every $10,000 they borrow.
But personal finance celebrity Suze Orman cautions parents not to use the reduced rates as an excuse to lean heavily on PLUS loans.
"I want to repeat advice I always give: Your kid borrows first. And parents only borrow if they have no credit card debt, have an eight-month emergency fund and are on-track with retirement savings," Orman wrote in a recent blog.
What if you have existing federal loans?
Unfortunately for graduates, the new rates apply only to new federal student loans — not to existing student loan debt.
"Borrowers cannot refinance old federal student loans into new federal student loans to take advantage of the new interest rates," says Kantrowitz.
If you're struggling with high-interest student loan debt, there are a couple of things you can do to tame it.
- During the pandemic, you can take the federal government up on its offer of forbearance, which pauses your student loan payments through Sept. 30 and cuts your interest rate to 0% during that time.
- If you have multiple federal student loans, you can consolidate them into one loan with one payment. That simplifies things, though it doesn't result in a lower interest rate.
How 'private' student loans can help
But here's one method that may cut your interest costs: You can refinance your federal loans into a "private" loan offered by an online lender, a traditional bank or a credit union.
"For borrowers with a very strong FICO credit score and financial picture, you may find you can lock in rates today that are one or more percentage points lower than what you’re currently paying on federal student loans," says Orman.
Rates on refinance private student loans have plummeted to as low as 2.99% for fixed-rate loans and just 1.99% for loans with variable rates, according to Kantrowitz.
You might use a website that will allow you to compare refinance rates in as little as two minutes and find a new private loan that will replace your old federal loans — and cost you much less each year.
Private student loans also can be useful for students who are still in school and who max out on federal loans. The limits on those loans allow undergrads to borrow up to $12,500 in one year and as much as $57,500 over a lifetime.
Those amounts can seem rather puny compared to today's college costs. During the 2019-2020 school year, annual tuition and fees at nonprofit, private four-year colleges averaged a whopping $36,880, the College Board says.
Private student loans can help students and their families meet those expenses. Interest on new private student loans has dipped as low as 4% on fixed-rate loans and just 1.5% on variable-rate loans, says Kantrowitz.
Borrow less, save more
Even with all-time low rates and options for saving money through refinancing, saving is the backbone of financial prep for college.
College 529 plans offer a way for families to save for higher educaction long before a child ever pledges allegiance to an institution.
You can select an education savings plan, to put money aside for future tuition, textbooks and other scholarly expenses, or a prepaid tuition plan, which allows payments to be made to participating colleges and universities in advance.
Each state offers its own 529 program, and some states offer income tax deductions for contributions made to a plan.
If family members start saving early enough, a student may have less need for loans — and less reason to worry about dealing with heavy student loan debt long after graduation.