New Federal Student Loans Are Getting Cheaper

Federal student loan rates are going down.

Interest rates for student loans in the federal direct loan program are decreasing by 0.52 percentage points for the 2019-20 school year compared with loans borrowed for 2018-19. The difference can be hundreds of dollars over the life of a loan.

The coming reduction is the first time in three years that federal loan rates have dropped.

Federal student loan interest rates for the 2019-20 school year, effective July 1:

4.53% for subsidized and unsubsidized undergraduate loans (down from 5.05%).
6.08% for unsubsidized graduate school loans (down from 6.60%).
7.08% for parent and graduate PLUS loans (down from 7.60%).

The government pays the interest on subsidized loans while the student is in school.

Why federal student loan rates are dropping

Congress sets new federal student loan interest rates annually for loans issued in the following academic year. Rates are based on the yield of the 10-year Treasury note, which is lower than when the government set last year’s rates.

Federal student loan interest rates are fixed throughout the life of the loan. The rates for loans issued in previous years don’t change.

For instance, a federal student loan borrowed in fall 2018 by an undergraduate had a 5.05% rate. If the student borrows again in fall 2019, the new loan will have a 4.53% rate. The rate on each loan will stay the same until the loan is paid off.

How to save more on student loans

Just because federal loan rates are dropping doesn’t mean students should borrow more.

Interest accrues daily while students are in school. And unless they have subsidized loans, students are responsible for paying it.

Here’s how students can limit their debt and save on student loan interest.

Limit borrowing. If your financial aid package includes more loans than you’ll need, accept a portion and reject the rest. Aim for payments no larger than 10% of your expected take-home pay if you have a solid idea of your future salary. Use a student loan affordability calculator to estimate how much that allows you to borrow.
Make payments during school. Interest that accrues during school gets capitalized, or added to the principal balance, when the loan enters repayment. Then, more interest accrues on the larger balance. Students can prevent this by making interest-only payments during school. If that’s too much to handle on a college budget, even paying $25 a month will help keep interest at bay.
Consider refinancing after graduation. Since federal loan rates are fixed, the only way to lower them is to refinance through a private lender. This is not the right move for everyone — refinanced federal loans lose eligibility for Public Service Loan Forgiveness and income-driven repayment. But if you have a credit score at least in the high-600s, a steady income large enough to afford your lifestyle and debt payments, and plan to work in the private sector, student loan refinancing may save you money.