Students entering college this year may get a better deal than their older brothers and sisters.
The interest rate on new federal student loans is set to drop for the 2019-2020 academic year. Students taking out undergraduate loans will pay an interest rate of 4.529%, according to estimates from Mark Kantrowitz, the publisher of Savingforcollege.com. That’s down from 5.05% for the 2018-2019 academic year.
The interest rate change also affects students borrowing for graduate school and parents borrowing to help pay for their kids’ schooling. Interest rates on direct unsubsidized loans for graduate students are set to drop to 6.079% from 6.6% last year. Rates on PLUS loans, which graduate students can use to pay for their education and which parents can use to pay for their children’s education, will drop to 7.079% from 7.6%.
More than 90% of student loans are federal loans.
The new loan rates take effect July 1, 2019. This year marks the first time in three years that the interest rate on new federal student loans has dropped.
“It’s going to lead to a little bit of savings,” Kantrowitz said. He estimates that for a borrower taking out a $10,000 loan and paying it back in 10 years, the new interest rates would save them a few hundred dollars over the lifetime of the loan.
The interest rates set this year only apply to new federal student loans and are fixed for the lifetime of the loan. Borrowers who already have federal student loans won’t see their interest rates change.
The federal student loan interest rate is tied to the May 10-year Treasury auction. The outcome of the Treasury auction is influenced by the Federal Reserve’s decisions, though not directly linked to them. The Fed raised rates four times last year and signaled it would continue that pattern, but then essentially took a U-turn in policy and has left interest rates unchanged over the past several months. That may in part explain why the outcome of the auction is lower than last year.
In addition, concern over political turmoil and volatility in international markets may have contributed to a lower Treasury yield, Kantrowitz said.
Private loan interest rates will likely remain unchanged. Typically, private lenders tie their student loan interest rates to the London Inter-bank Offered Rate, or LIBOR.
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