Interest rates on new federal student loans and Parent PLUS loans will increase by almost a percentage point on July 1, 2021.
Why are interest rates rising, given that the pandemic is still ongoing?
Federal student loan interest rates indexed to the legal formula
Interest rates on federal loans are fixed, but new loans each year have a new fixed rate.
Interest rates on new federal education loans are reset every July 1, based on the high yield from the last 10-year Treasury bill auction in May.
This formula is set by law and is not subject to the discretion of the US Department of Education. The Higher Education Law of 1965 [20 USC 1087e(b)(8)] specifies the interest rates as follows:
- Federal Direct Stafford Loans (Undergraduate): High yield + 2.05% with a cap of 8.25%
- Federal Direct Stafford loans (graduates): High Yield + 3.6% with a ceiling of 9.5%
- Federal Direct PLUS Loans (Parent PLUS and Grad PLUS): High Yield + 4.6% with a ceiling of 10.5%
Since the high yield on the May 12, 2021 10-year Treasury bill auction was 1.684%, the new interest rates will be 3.734%, 5.284% and 6.284%, respectively.
Although these interest rates are higher than last year’s record interest rates, they are still among the lowest interest rates in the history of federal student loan programs.
Impact of payment pause and interest waiver
The suspension of payment and the interest waiver will expire on September 30, 2021. In a interview with the Education Writers Association (EWA) on May 20, 2021, US Secretary of Education Miguel Cardona said the US Department of Education is considering a possible further extension.
Until the payment break and the interest waiver expire, the interest rate on all eligible federal loans will continue to be temporarily set at 0%. After expiration of the payment pause and interest waiver, the interest rates will revert to the applicable rates previously specified.
Options after expiration of payment break and interest waiver
Borrowers who are still in financial difficulty after the payment break and interest waiver expire will still have a few options, some of which will forgo some or all of the new accrued interest.
These options include postponement of economic hardship, postponement of unemployment, blanket abstentions, and income-based repayment plans.
On a deferral, the federal government pays the interest on the subsidized loans. Interest on non-subsidized loans remains the responsibility of the borrower. If this interest is not paid over time, it will be added to the loan balance at the end of the suspension period.
During forbearance, the federal government does not pay interest on loans, whether subsidized or not.
Borrowers with little or no income can claim the equivalent of a payment break using an income-based repayment plan. If your adjusted gross income (AGI) is less than 100% of the poverty line (ICR) or 150% of the poverty line (IBR, PAYE and REPAYE), your monthly payment will be zero. If you are already on an income-based repayment plan and have lost your job or suffered a pay cut, you can ask the loan manager to recertify your income sooner. The loan manager may request a copy of the termination notice or proof of recent receipt of unemployment benefits.
Some of the income-oriented repayment plans may involve a full or partial waiver of interest. The federal government will pay accrued but unpaid interest on subsidized loans during the first three years under the IBR, PAYE and REPAYE repayment plans. In addition, the federal government will pay half of the accrued but unpaid interest on unsubsidized loans during the first three years under the REPAYE repayment plan. After the first three years, the federal government will pay half of the accrued but unpaid interest on the subsidized and unsubsidized loans for the remainder of the repayment term under the REPAYE repayment plan.