Published in: Student Loans | July 30, 2019

Federal Student Loan Rates Are Finally Dropping. How Much Will It Save You?

By:  Lyle Daly

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Financing your education just got less expensive.

Young man looking at a chart on the wall with bars that are steadily decreasing.

Image source: Getty Images

If you’re currently attending college or plan to start next year, then there’s good news on the student loan front. Federal student loan interest rates are decreasing, and the change goes into effect on July 1, 2019.

This is a welcome change for students who need loans to finance their education, as it’s the first time federal loan rates have gone down in the last three years. Here are all the details on these new interest rates, including how much money you could save.

What are the new federal student loan interest rates?

With federal student loans, the interest rate depends on the type of loan and the borrower. The new interest rates for each type of loan and borrower are as follows:

Loan Type

Borrower Type

Interest Rate as of July 1, 2019

Previous Interest Rate

Direct Subsidized Loans and Direct Unsubsidized Loans

Undergraduates

4.53%

5.05%

Direct Unsubsidized Loans

Graduates and Professionals

6.08%

6.6%

Direct PLUS Loans

Parents, Graduates, and Professionals

7.08%

7.6%

Data source: Credible.

As you can see, each type of loan will have its interest rate reduced by 0.52%. It’s not a massive difference, but even fractions of a percent can help you save when you’re borrowing a large amount of money and paying it off over a span of 10 years or longer.

These new interest rates only apply to federal student loans that are disbursed on or after July 1, 2019. Your interest rate won’t change on any previous federal loans that you have.

How much could you save on your federal student loans?

Let’s run through a few scenarios to get an idea of how much you’d save on each type of loan. The table below shows you how much total interest you’d pay with the old interest rates compared to the new ones. Note that with each type of loan, the calculations assume the borrower is on a standard repayment plan with a 10-year term.

Loan Type

Borrower Type

Loan Balance When Starting Repayment

Interest Paid (Old Interest Rates)

Interest Paid (New Interest Rates)

Total Savings

Direct Subsidized and Unsubsidized Loans

Undergraduates

$20,000

$5,514.43

$4,907.82

$606.61

Direct Unsubsidized Loans

Graduates and Professionals

$40,000

$14,747.56

$13,482.91

$1,264.65

Direct PLUS Loans

Parents, Graduates, and Professionals

$60,000

$25,841.29

$23,895.12

$1,946.17

Data source: Author’s calculations.

Even though interest rates are decreasing the same amount for each type of loan, it’s graduate students, professionals, and parents taking out federal student loans for their children who stand to save the most. They have larger loan limits than undergraduates and they usually need to borrow more, which means they also end up saving more on interest.

Will private student loan interest rates drop as well?

It’s unlikely that this drop in federal student loan interest rates will affect interest rates on private student loans.

Private student loan providers generally base their interest rates on the London Interbank Offered Rate (LIBOR), not federal rates.

Fortunately, private student loan rates through the best lenders can already be lower than what you’d get with a federal loan. To qualify for the lowest rates, you’ll either need an excellent credit score of your own, or you’ll need to have a cosigner with excellent credit.

Saving money on your schooling

Since it’s often recommended that college students exhaust all their federal loan options first, any interest rate reduction for these types of loans is a welcome change. Depending on the amount you borrow and how long it takes you to pay off your federal loans, these new interest rates could end up saving you over $1,000.

Even with lower interest rates on federal loans, it’s still important that you limit your borrowing as much as possible. You should also pay whatever you can towards your student loans during school. By following these two tips, you’ll minimize your student loan burden when you get out of school, and that will make it easier to pay those loans off and become debt-free.

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