Lower student loan rates may be on the horizon

Borrowing money for tuition may soon become less expensive. The 10-year Treasury note, a barometer of rates on federal student loans and other types of loans, recently dropped to an all-time low.

Anyone looking for federal student loans for the 2020-2021 calendar year could potentially pay considerably less interest.

Of course, fears about the spread of the coronavirus and volatility in financial markets are a big part of the reasons borrowing costs could drop.

At the beginning of March, the The Fed cut the federal funds rate 0.5% in an effort to mitigate the economic turmoil caused by the coronavirus epidemic. This is the Fed’s biggest cut in over a decade. And since the spread of the coronavirus, investors have fled to safe asset classes, like U.S. government bonds, driving down the 10-year Treasury yield.

Throughout March, the yield on the benchmark 10-year Treasury bond remained at an all time high. If the yield stays near or below 1% until rates are reset by the Fed later this year, federal student loan interest rates could drop drastically.

When can student loan rates bottom out?

Mark Kantrowitz, editor and vice president of research for SavingforCollege.com, says that given the right circumstances, federal student loan rates may hit all-time highs this year.

The government sets a new year federal student loan rates every July 1 based on the 10-year Treasury bill auction in May, plus a margin.

The current rate is 4.53 percent for Undergraduate Stafford loans, 6.08 percent for Stafford graduate loans, and 7.08 percent for PLUS loans.

Kantrowitz says the rates on those loans could drop to 3.2%, 4.7% and 5.7%, respectively. These forecasts are based on the latest 10-year Treasury bill auction. They also assume that the Federal Reserve’s recent half-point rate cut results in a similar rate cut to comparable periods in previous years.

But these are predictions. There are many factors that could change the outlook on student loan rate.

A key question, notes Kantrowitz, is whether the markets will become calmer over the next three months. If the market turmoil eases, he says, real interest rates could be higher than expected.

What student loan borrowers can do

Lower interest rates on federal student loans could save borrowers thousands of dollars, but sadly, not everyone will be able to benefit from them.

If interest rates on federal student loans go down, it will be primarily of interest to those taking out a loan in the 2020-2021 academic year. For most borrowers with a federal student loan, not much will change.

This is because you cannot refinance old federal student loans into new federal loans to get a lower interest rate. You also can’t borrow for future federal student loans, because the interest rate set is based on the loan disbursement date, says Kantrowitz.

What you can do, however, is refinance a federal loan into one. private student loan. Private student loan companies will react more quickly to changes in interest rates than federal student loans, Kantrowitz says. So it might be worth shopping around with private lenders.

Borrowers who already have a loan in the private market can expect their variable rate loans to be cheaper. The most solvent borrowers in the private market will also be able to refinance at lower rates.

Also keep in mind that the CARES Law which came into effect at the end of March suspends all interest charges on federal student loans until September 30 and extends the option to suspend loan payments during that time. So even though you may not be able to take advantage of lower rates on your current loan, you may find some relief if you are having trouble keeping up with your payments.

Learn more:

About admin

Check Also

Digital Loans: New Era Practice of Applying for Instant Loans

As the second most populous nation in the world, India has always experienced a widespread …

Leave a Reply

Your email address will not be published.