Student loan rates set to hit historic lows amid coronavirus pandemic
For years, student loan borrowers have suffered under the weight of excessive debt and excessive interest. It’s about to change.
That, in turn, could mean that borrowers will also see interest rates on their college debt fall – likely to record lows.
In times of extreme uncertainty, investors turn to safe-haven investments such as treasury bills.
Accordingly, the return of the benchmark 10-year Treasury bill, which moves inversely to price, recently hit an all-time low before rebounding slightly during a series of tumultuous trading days caused by the Covid-19 epidemic.
With the 10-year Treasury yield now close to just 1%, students heading to college in the fall should benefit from a break on federal and private student loan rates.
The undergraduate Stafford loan rate is currently 4.5% for the 2019-2020 academic year. All federal education loans issued for 2020-2021 will be subject to new rates based on changes in the government’s cost of borrowing.
A government auction of 10-year treasury bills on May 12 will determine the rates on new federal student loans taken out over the next academic year.
Interest Rates for Federal Undergraduate Student Loans could fall below 2% for the first time, according to Mark Kantrowitz, editor of SavingForCollege.com.
All federal education loans issued after July 1 will be subject to these rates.
If the 10-year yield stays close to 1%, the average student could save $ 562 to $ 2,335 in interest charges on loans taken out in the 2020-2021 academic year, compared to going rates currently, according to data compiled by Credible.com, an online lender marketplace.
“When that borrower does eventually repay, these low rates will lower interest charges and give them more confidence to pay off their debt faster,” said Andrew Pentis, a certified student loan advisor.
However, if interest rates rise again during a student’s remaining years in school, this “could lead to higher monthly payments and total repayment costs after graduation,” said Robert Humann, Managing Director of Credible.
If you have a mix of federal and private loans, as many borrowers do, now is a good time to consider refinancing.
Borrowers can refinance federal student loans and private loans into new fixed rate loans to lock in those record rates.
“Anyone with a private loan should get a lower rate for sure,” Humann said.
However, consolidating or refinancing a federal loan to a private loan will forgo the safety nets that come with federal loans, including income-based repayment programs and loan cancellation, for those who would qualify.
These programs could be a lifeline in the midst of COVID-19. In this environment, Kantrowitz advises borrowers to be particularly careful before refinancing.
“Federal loans offer many more options for dealing with financial hardship than private loans,” he said.