Senate education committee Chairman Lamar Alexander (R-TN) on Tuesday, May 12, said “interest rates on new federal student loans will drop to historic lows on July 1st.”

“This rate drop is a result of Congress working together in 2013 with President Obama to tie student loan rates to actual federal government borrowing costs,” Sen. Alexander said. “And I plan to continue working together with my colleagues in a similar bipartisan fashion this year to continue passing legislation to help make college more worth student’s time and money.”

The interest rate on undergraduate loans will be 2.75% for the 2020-2021 school year, down from 4.53% in the 2019-2020 school year. The interest rate on loans for graduate students will be 4.3% (down from 6.08%) and for PLUS loans for parents and graduates will be 5.3% (down from 7.08%).

Chairman Alexander, along with Senators Angus King (I-ME), Richard Burr (R-NC), Joe Manchin (D-WV), Richard Durbin (D-IL) and the late Tom Coburn of Oklahoma sponsored the Bipartisan Student Loan Certainty Act of 2013 that tied student loan interest rates to market rates.

Under the Bipartisan Student Loan Certainty Act, student loan interest rates are tied to the government’s 10-year borrowing cost – specifically the yield on the last auction of the U.S. Treasury 10-year Note held before June of each year. The rates for undergraduate loans are the 10-year Note plus 2.05 percentage points – an addition to cover costs of defaults, collections, deferments, forgiveness, and delinquency. The legislation capped undergraduate rates at 8.25%, so students will never have to pay more than 8.25% interest on their loans.

Additionally, the CARES Act, which was signed into law in March, will help students and schools who have had their education disrupted by COVID-19 by allowing students to defer student loans payments for 6 months and keep their Pell grants.