Before and During College: Federal Student Loan Interest Rates Drop for 2019-20

Here’s some good news for students and parents borrowing to pay for college — Federal Direct Loan Program (FDLP) interest rates are dropping effective July 1.

The U.S. Education Department (ED) hasn’t yet announced this, but the New York Times and other reputable publications such as Forbes have run stories about it based on expert analysis.

These reductions leave interest rates above their 2017-18 levels, and at best they’ll reduce borrowing costs for the typical FDLP borrower by a few dollars a month. So don’t let the new interest rates motivate you to borrow more than you absolutely need. Nevertheless, it’s better to have an interest rate decrease than an interest rate increase.

Some of the most common questions borrowers have about FDLP interest rates are:

How long may I borrow at the interest rates that begin this coming July 1?

Each FDLP interest rate year runs from July 1 through June 30. The 2019-20 rates apply to loans made — i.e. first applied to what you owe your school or released directly to you or your bank account — on or after July 1, 2019 all the way through June 30, 2020, even if portions of those loans are made after June 30, 2020.

I understand each year’s loans are at “fixed” interest rates. What’s this mean?

The rates on loans you get each year will never change. For example, a 2018-19 FDLP unsubsidized loan you borrowed at 5.05% will still have a 5.05% interest rate when you finish repaying that loan.

If my interest rates on FDLP loans never change, what’s the rate on my combined loans?

It’s a “weighted average” interest rate that reflects the interest rate of each of your loans as a share of your total debt. So if you borrowed a subsidized loan of $2,000 at 4.45% in 2017-18 and $2,000 at 5.05% in 2018-19, the weighted average interest rate on your combined debt of $4,000 is 4.75%.

Will the FDLP interest rate reductions apply to private student loans?

No, but they may influence private lenders who compete with the FDLP to cut their interest rates.

How are each year’s FDLP interest rates set?

They’re based “the highest priced 10-year Treasury notes auctioned at the final auction held prior . . . to June 1.” Then there’s an add-on of 2.05% for subsidized and unsubsidized loans for undergraduates, 3.6% for unsubsidized loans for graduate and professional students, and 4.6% for all PLUS loans regardless of their borrowers. There are also maximums past which interest rates may not go — 8.25% for undergraduate subsidized and unsubsidized loans, 9.5% for graduate and professional student unsubsidized loans, and 10.5% for PLUS loans.

Contact College Affordability Solutions if you have additional questions about the federal student loan programs in general or their interest rates in particular. As with all of College Affordability Solutions’ services for college students and their families, you’ll not be charged for this.

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