Personal Finance

Federal student loan rates set to hit historic lows

Key Points
  • If the 10-year yield stays near 1%, federal student loan interest rates could drop significantly when they reset later in the year, saving borrowers hundreds or thousands of dollars in interest.
  • If you have a mix of federal and private loans, this is a good time to consider refinancing.
Financial expert Stacy Francis on how students can lower their debt burden
Financial expert Stacy Francis on how students can lower their debt burden

For years, student loan borrowers have suffered under the weight of excessive debt and interest. That's about to change.  

As fears surrounding the coronavirus rise, the yield on the 10-year Treasury note, which is a barometer for student loans and other borrowing rates, has plummeted. 

That, in turn, could mean borrowers will see the interest rates on their college debt tumble as well — likely to record lows. 

How loan rates work

In times of extreme uncertainty, investors look to safe-haven investments such as Treasurys. 

As a result, the yield on the benchmark 10-year Treasury note, which moves inversely to price, hit an all-time low recently before rebounding slightly in a series of tumultuous trading days caused by the COVID-19 outbreak.

With the 10-year Treasury yield now near a mere 1%, students headed to college in the fall should get a break on both federal and private student loan rates.

Federal student loans

The rate on undergraduate Stafford loans is currently 4.5% for the 2019-2020 academic year. All federal education loans issued for 2020-2021 will be subject to new rates based on changes in the government's cost of borrowing. 

A government auction of 10-year Treasury notes on May 12 will determine rates on new federal student loans taken out during the upcoming academic year. 

Interest rates for undergraduate federal student loans could fall below 2% for the first time ever, according to Mark Kantrowitz, publisher of 

All federal education loans issued after July 1 will be subject to those rates.

If the 10-year yield stays near 1%, the average student could save $562 to $2,335 in interest charges on loans taken out during the 2020-2021 academic year, compared to the rates in effect now, according to data compiled by, a marketplace of online lenders. 

"When that borrower eventually enters repayment, these low rates will keep interest rate charges down and give them more confidence to pay their debt faster," said Andrew Pentis, a certified student loan counselor.

However, if interest rates go back up during the remaining years a student is in school, that "could result in higher monthly payments and total repayment costs after graduation," said Robert Humann, Credible's general manager.

Private student loans

Private loans may be fixed or may have a variable rate tied to Libor, prime or T-bill rates, which means that when the Federal Reserve cut rates to essentially zero, borrowers with private loans will also pay less in interest, although how much less will vary by the benchmark and the terms of the loan.

Rates on a private variable loan have fallen to 2.4% and 10-year fixed-rate loans are as low as roughly 3.8%, down from a July 2018 peak of 6.05%, on average, according to Credible.

"Those rates have nowhere to go but up," Kantrowitz said.

More from Personal Finance:
What the Fed cutting interest rates to zero means for you
Trump gives people with student loans a break amid coronavirus
How you can profit from the record low 10-year Treasury yield

Refinancing student loans

If you have a mix of federal and private loans, as many borrowers do, this is a good time to consider refinancing.

Borrowers can refinance federal student loans and private loans into new fixed-rate loans to lock in these record low rates.

"Anyone with a private loan should be locking in a lower rate, for sure," Humann said. 

However, consolidating or refinancing from a federal loan to a private loan will forgo the safety nets that come with federal loans, including income-based repayment programs and loan forgiveness, for those who would qualify.

These programs could be a lifeline amid COVID-19. In this environment, Kantrowitz advises borrowers to be particularly careful before refinancing. 

"The federal loans provide many more options for dealing with financial difficulty than private loans," he said. 

Trying to get student loans forgiven? Here are some helpful resources
Trying to get student loans forgiven? Here are some helpful resources