Student loan interest rate forecast for 2021: Rates are unlikely to rise

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The COVID-19 crisis caused many Americans to fall into physical or financial hardship in 2020. As a result, student loan interest rates fell to historic lows, largely in part due to the Federal Reserve slashing interest rates as an attempt to stimulate the economy.

“In the marketplace, interest rates go higher when the economy is stronger and go lower when the economy is weaker,” says Mark Hamrick, Washington Bureau Chief and senior economist for Bankrate. With the economic crisis the U.S. experienced in 2020, it makes sense that the interest rates fell to the level that they did.

Even with the arrival of a COVID-19 vaccine, student loan interest rates are unlikely to rise much in 2021, as the economy will likely still be in recovery mode. Federal student loan rates for the 2021-22 school year will likely remain stable, and private student loan rates should follow.

Interest rates should remain stable in 2021

The low student loan rates seen in 2020 should continue to hold steady. “I expect interest rates to remain stable, in part because the Federal Reserve Board has announced they will keep interest rates low through 2023,” says student loan expert Mark Kantrowitz. The federal funds rate sets the bar for federal student loan rates, but it also influences the rates that private lenders offer.

The interest rates on federal student loans disbursed between July 1, 2020, and June 30, 2021, are as follows:

  • Undergraduate Direct Subsidized and Direct Unsubsidized Loans: 2.75 percent.
  • Graduate Direct Unsubsidized Loans: 4.3 percent.
  • Parent and Graduate Direct PLUS Loans: 5.3 percent.

Private student loan interest rates are currently hovering around 1 to 13 percent variable and 4 to 14 percent fixed.

A COVID-19 vaccine is unlikely to cause major rate changes

The coronavirus vaccine is likely not going to cause a dramatic increase in rates, but there is the potential for a slight shift. If the vaccines prove ineffective at ending the pandemic, you will see a drop in interest rates, Kantrowitz says. On the other hand, “if the economy accelerates rapidly and everything (not just the stock market) returns to pre-pandemic norms, maybe there’ll be an increase, but it should be very small, a fraction of a percent.”

Student loan borrowers may want to switch their focus, says Hamrick. Those who currently have student loan debt or are anticipating taking out student loans may want to turn their attention away from anticipated interest rates and on to managing finances. “I would be more focused on trying to manage personal finances more broadly by controlling expenses, paying down debt and paying down student loan debt,” Hamrick says, “particularly given the fact that there’s been this period where interest rates have been forgiven because of the pandemic.”

Biden’s policies may change payments

Since the federal reserve has already set rates until 2023, there likely won’t be much change to your rates during a Biden administration. However, there is the possibility that your student loan payments could see some change in 2021 under the Biden administration.

Biden has proposed immediate student loan forgiveness for federal student loan borrowers, as well as free and reduced tuition costs, but Hamrick advises federal student loan borrowers to be cautious with their assumptions. “It appears to me that the President-elect [administration] is taking a cautious stance with respect to what they are going to do … The reality is that the policy prescriptions that seem to be most likely are rather minimal with respect to the actual student loan debt balances out there.”

Private student loans will likely not see much impact

Because private student loans adjust rates regularly, they’re more responsive to economic changes, says Kantrowitz. But due to the Federal Reserve keeping the federal funds rate low, private student loans shouldn’t see much change in the coming year.

While rates aren’t expected to change too drastically, it’s always a good idea to check in with your lender about any potential changes in your COVID-19 hardship relief.

This is a prime time for refinancing

With the federal forbearance program set to expire at the end of January and interest rates expected to stay low, refinancing could be a smart money move to make in 2021. Refinancing into a low fixed rate now could save you money in the long term, especially if you took out your loan when rates were high.

Just keep in mind that refinancing your federal student loans means that you will no longer be able to take advantage of income-based repayment plans, student loan forgiveness and any additional federal forbearance periods.

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