The interest rate for federal direct Stafford loans for undergraduate students will increase to 3.73% on July 1, nearly a percentage point higher than the 2.75% rate for loans issued for the 2020–21 academic year, according to an analysis by Mark Kantrowitz, a student loan expert and author of How to Appeal for More College Financial Aid.
Interest rates on federal student loans are tied to the 10-year Treasury note, which has been inching higher. Rates on federal student loans are still much lower than they were a few years ago.
Rates on new federal loans are set for the life of the loan, so borrowers who took out loans at higher rates can’t refinance to a federal loan at a new, lower rate. Borrowers with good credit may be able to lower payments by refinancing with a private student loan. However, even if that’s an option, you’re better off waiting until after a pause on federal loan payments and interest expires on September 30, Kantrowitz says.
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The rate on PLUS loans, which are available to parents and graduate students, is expected to rise, from 5.3% to 6.28%. At that rate, refinancing to a private loan offers even more potential for savings.
But borrowers need to understand the trade-offs, Kantrowitz says. Federal loans offer benefits that private loans lack, such as income-based repayment plans and loan forgiveness. In addition, if President Biden’s proposal to forgive up to $10,000 in student loans is enacted, it would most likely be limited to federal loans.
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