Rates on Student Loans Will Go Up
You could refinance with a private student loan, but consider waiting until the pause on federal loan payments expires.
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.
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.
