Personal Finance Insider writes about products, strategies, and tips to help you make informed decisions with your money. We may receive a small commission from our partners, such as American Express, but our reports and recommendations are always independent and objective.

  • Federal student loan interest rates are at an all-time low for the 2020-2021 school year.
  • All federal undergraduate student loans will carry an interest rate of 2.75%, while graduate student loans are set at an interest rate of 4.3%. The previous record was 2.875% set in 2005.
  • This year’s interest rates are 1.78% lower than the previous school year for all types of loans.
  • Learn more about obtaining or refinancing a student loan with CommonBond »

Federal student loans will be much more affordable during the 2020-2021 school year, according to the new interest rates of the Department of Education.

Since March 2020, interest rates have fallen in all Federal Reserve cuts federal funds rate. Lower interest rates will make federal and private student loans cheaper for this school year, sending the federal student loan interest rate to record highs.

The federal student loan interest rate changes with each school year a student borrows money and changes depending on the type of loan taken out. For the 2020-2021 school year, borrowers will pay between 2.75% and 5.3%, depending on the type of loan.

All undergraduates who take out unsubsidized or subsidized loans will pay an interest rate of 2.75%, while graduate students will pay 4.3%.

This year’s student loan interest rate is the lowest on record, beating the previous low of 2.875% established in 2005, according to Mark Kantrowitz, student loans expert and vice president of research at Savingforcollege.com.

Over the past 10 years, undergraduates have typically paid between 5% and 3.4% interest, according to Department of Education data. Graduate student loans charged between 5.31% and 6.21%, and PLUS loan borrowers charged between 7.9% and 6.31%, depending on the school year.

Last year, undergraduate student loans carried an interest rate of 4.53%, while graduate student loans carried an interest rate of just over 6% and loans PLUS a little over 7%. This year, students will pay 1.78% less than last year.

Former students can lower their interest rate by refinancing

The lower interest rates this school year will not retroactively affect student loan interest rates. However, new graduates can benefit from lower interest rate through refinance their student loans. Refinancing – replacing your existing loan with a new private loan with a lower interest rate – could help you lower the interest rate on your student loan. With interest rates so low, you could find one that is lower than your current loan rate, and refinancing could help you save money.

However, it should be noted that refinancing may lead you to lose all advantage, such as the protections that the Department of Education put in place during the coronavirus pandemic. All federal student loans in repayment are on automatic forbearance, with interest rates set at 0% and automatic payments suspended until September 30. Refinancing turns federal student loans into private student loans, which are not eligible for this forbearance.