Lower student loan rates could be on the horizon

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Borrowing money for educational costs could soon become less expensive. The 10-year Treasury note, a barometer for federal student loan rates and other types of loans, recently sank to an all-time low.

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

Of course, fears over a spreading coronavirus and financial market volatility are largely the reasons why borrowing costs could fall.

At the beginning of March, the Fed slashed the federal funds rate by 0.5 percent in an effort to tamp down the economic turmoil from the coronavirus outbreak. It’s the largest cut the Fed has made in more than a decade. And since the coronavirus spread, investors have been fleeing 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 note has remained at record lows. If the yield remains near or below 1 percent until rates are reset by the Fed later this year, federal student loan interest rates could drop drastically.

When could student loan rates bottom out?

Mark Kantrowitz, publisher and VP of research for SavingforCollege.com, says that given the right circumstances, it’s possible that federal student loan rates could hit record lows this year.

The government sets new annual rates on federal education loans every July 1 based on the 10-year Treasury note auction in May, plus a margin.

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

Kantrowitz says that rates for those loans could drop to 3.2 percent, 4.7 percent and 5.7 percent, respectively. Those predictions are based on the most recent 10-year Treasury note auction. They also assume that the Federal Reserve’s recent half-point rate cut yields a similar reduction in interest rates as comparable periods in previous years.

But these are predictions. There are a lot of factors that could change the outlook on student loan rates.

One key question, notes Kantrowitz, is whether the markets will become calmer in the next three months. If the market turmoil abates, he says, actual interest rates might be higher than expected.

What student loan borrowers can do

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

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

That’s because you can’t refinance older federal student loans as new federal loans to obtain a lower interest rate. You also can’t borrow for future federal student loans, since the interest rate set is based on the date the loan is disbursed, says Kantrowitz.

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

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

Keep in mind, too, that the CARES Act that went into effect in late March suspends all interest charges on federal student loans through September 30 and extends the option to suspend loan payments during that period. So even if you can’t take advantage of lower rates on your current loan, you may find some relief if you’re having trouble keeping up with payments.

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