Students taking out federal student loans this fall will pay higher interest rates than last year (the lowest rates in history), but still lower than their pre-COVID level.
The interest rates for federal student loans for the coming academic year are set based on the May 10-year Treasury notes auction. That auction took place on May 12, and we now know the interest rates for student loans effective July 1, 2021 through June 30, 2022.
2021-2022 New Federal Student Loan Rates
Based on today’s 10-year Treasury auction, we will see the following rates for the 2021-2022 year:
|Undergraduate Borrowers||Graduate or Professional Borrowers||Parents and Graduate or Professional Students|
|Direct Subsidized Loans and Direct Unsubsidized Loans||Direct Unsubsidized Loans||Direct PLUS Loans|
All interest rates shown in the chart above are for loans first disbursed on or after July 1, 2021, and through June 30, 2022. These are fixed rates that will not change for the life of the loan.
This represents a 0.98% increase over the current rates.
However, right now, all Federal Loans are at 0% interest due to the COVID-19 Emergency Relief Flexibilities being extended through at least September 30, 2021. This extension means payments and interest will only start to accrue on qualifying federal student loans until after September 30, 2021.
How Federal Student Loan Rates Are Set
Federal student loan interest rates are set for each coming school year based on the May 10-year Treasury auction, plus an add-on interest rate.
Given that the May 2021 10-year Treasury yield was 1.68%, we get the rates listed above. The 10-year Treasury yield from last year was 0.70%
The Department of Education uses the following formulas:
- Direct Loans for Undergraduate Borrowers: 10-year Treasury yield plus 2.05%
- Direct Loans for Graduate or Professional Borrowers: 10-year Treasury yield plus 3.60%
- Direct PLUS loans: 10-year Treasury yield plus 4.60%
Higher than last year but lower than pre-COVID
Despite the Federal Student Loan Rates for AY21/22 is 0.98% higher than the current AY20/21, they are still lower than their pre-COVID level.
|Loan Type||Undergraduate Borrowers||Graduate or Professional Borrowers||Parents and Graduate or Professional Students|
Fees for Federal Student Loans
Federal Student Loans also charge fees that are a percentage of the total loan amount. Similar to the fixed interest rate, these depend on the loan type and are set annually. The fee is deducted from each loan disbursement you receive while enrolled in school.
For example, a 4.228% fee means if you want your school to receive $10,000 in disbursement, you need to “effectively” borrow $10,441.5 (=$10,000/(1-4.228%)) in principal for that student loan to cover the fee, so that your school will receive $10,000. Or if you borrow for $10,000 in principal, your school will then only receive $9,577.2 (=$10,000*(1-4.228%)) actual disbursement.
|First Disbursement Date||Loan Type||Loan Fee|
|On or after 10/1/20 and before 10/1/21||Direct Subsidized Loans and Direct Unsubsidized Loans||1.057%|
|Direct PLUS Loans||4.228%|
What is APR?
The interest rate is the cost of borrowing money. Each month the accrued interest will be added to the principal due in your monthly payment until you pay the principal back in full.
The APR includes any origination fee or other costs that may be added when signing your loan agreement in addition to the interest rate. For a mortgage lender these are commonly called closing costs when taking on a home loan. With the Truth in Lending Act, lenders are required to disclose the APR before you sign a loan or take on a credit obligation. Typically fees mean your APR will be higher than the interest rate offer.
How to Calculate APR
Now that we have the fees for each loan type, the next step to finding the APR is to estimate the monthly payment amount. Rather than breaking out the calculator or pen and paper, open excel or google sheets and type the following formula:
- rate is the interest rate divided by 12 (to get the monthly instead of annual rate)
- nper is the number of payment periods, or months, you will make payments on the loan to repay it
- pv is the present value, or principal, of the loan (including any fees charged upfront)
Now you can use that payment figure to calculate the APR in excel using the following:
- nper is the same number of payment periods you used before
- pmt is sht monthly payment figure you calculated above
- pv is the principal amount (this time without including any fees charged upfront)
APR for Federal Student Loans
Need an example of what APR vs interest rate can look like in the wild? We solved for each type of federal loan offered over a ten-year repayment period.
APR for Direct Loans First Disbursed on or After July 1, 2021, and Before July 1, 2022
|Borrower Type||Loan Type||Fixed Interest Rate||APR*|
|Undergraduate Borrowers||Direct Subsidized Loans and Direct Unsubsidized Loans||3.73%||3.96%|
|Graduate or Professional Borrowers||Direct Unsubsidized Loans||5.28%||5.51%|
|Parents and Graduate or Professional Students||Direct PLUS Loans||6.28%||7.25%|
|*Calculated assuming a 10-year term|
But what if you think you are going to refinance or repay it back in less than ten years? Your effective APR will be even higher given the fees are charged upfront.
What a Difference Fees Can Make
While the interest rate can give you a good idea of how much your monthly payments will be, they aren’t the whole picture. Calculating your APR based on your estimated repayment timeline is critical to know the cost of borrowing from a lender, whether it is a federal or private student loan.
By Scarlett Li