Now that the May Treasury auction has taken place, student loan interest rates for the 2021-2022 school year are set. This year’s yield on the 10-year treasury was 1.684%, up about 1% from a year ago. Since student loan interest rates are fixed markups from the May treasury yield, that means student loan interest rates will go up about 1% for loans disbursed after July 1, 2021.
The new (and old) rates are as follows:
|Loan Type||Markup||2021-2022 Rate||2020-2021 Rate|
|Direct Undergraduate Loan||2.05||3.734%||2.75%|
|Parent PLUS Loan||4.6||6.284%||5.30%|
|Direct Graduate Loan||3.6||5.284%||4.30%|
Translating that into dollars: A first-year student who borrowed $5,500 unsubsidized for the 2020-21 school year and waited until graduation to repay that loan will pay $58.25 per month for 10 years. A student who does the same for the coming school year will pay $63.24 per month for 10 years, or $5 more per month. While $5 per month isn’t huge, that translates to 120 x $5 over the 10 year repayment period, or $600. And that’s only one year’s loans.
Nonetheless, despite the increase, the rates for the coming year remain well below typical recent years’ rates.
Students who have the ability to repay student loans while still in college should compare interest rates each year to determine whether it makes more sense to pay off a prior year’s loan– and if so, which?– or to reduce borrowing for the coming year. This is a simple matter of interest rates– if you can borrow more cheaply than an existing loan, then paying down the existing higher interest rate loan makes more sense. For example, a rising senior who has borrowed every year has the following interest rates:
- Freshman year (2018-2019) 5.045%
- Sophomore year (2019-2020) 4.529%
- Junior year (2020-2021) 2.75%
- Senior year (2021-22) 3.734%
If that student has an extra $2,000 to put towards college, they would be better off paying down their freshman year loan than reducing their senior year loan.