Advertisement
interest rates

Coronavirus Fears Suppress Student Loan Interest Rates

The plunge in interest rates could reduce borrowing costs for students who take out federal loans for the 2020-2021 academic year—and their parents could get a break, too.

Interest rates for federal undergraduate, graduate and parent PLUS loans issued after July 1 are tied to the rate for the 10-year Treasury at the May auction, which will be held on May 12. The 10-year Treasury has been pushed down recently because of fears that the coronavirus panic will continue to weigh on the economy. If the 10-year Treasury remains at or below current levels—which seems highly likely—the rate on undergraduate loans would be about 2%. Graduate students would pay about 3.5%, while the rate on parent PLUS loans would be below 4.5%.

Advertisement - Article continues below

That's a sharp drop from a year ago, when the rates were 4.53% for undergraduate loans, 6.08% for graduate loans and 7.08% for PLUS loans.

Rates on federal loans are fixed for the life of the loan, so the new rates will only apply to loans issued after July 1. The only way borrowers with existing federal student loans can reduce their interest rates is by refinancing to a private student loan, where interest rates have fallen as low as 3% for a 10-year, fixed-rate loan, says Travis Hornsby, founder of Student Loan Planner, which helps borrowers manage student loans.

However, those low rates are typically limited to high-income borrowers with good credit. And when you refinance to a private loan, you give up some benefits that come with federal loans, such as forbearance or deferment if you encounter economic hardship.

If you already have a private student loan, however, there's no downside to refinancing into a loan with a lower rate, Hornsby says. Lenders don't charge closing costs, as is the case with mortgages, and some will even offer new borrowers a bonus, he says.

Even if you're a good candidate to refinance your federal loans, you may want to put it on hold for now. In response to the coronavirus pandemic, which led hundreds of colleges and universities to send students home, President Trump has announced plans to temporarily waive interest on federal student loans. The waiver won't reduce borrowers' monthly payments, because those payments will go towards the principal on the loan. It's also unclear how long the waiver will last and whether the interest will be tacked on to the loan at some later date.

But if you need to apply for forbearance, the waiver could provide real savings. Ordinarily, interest accrues while a student loan is in forbearance, but that won't happen if interest on the loan is waived.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

When Is Amazon Prime Day 2020?
spending

When Is Amazon Prime Day 2020?

Circumstances beyond its control have forced Amazon to move its annual Christmas-in-July Amazon Prime Day blowout sale in 2020 to ... later. Is Oct. …
September 22, 2020
FAQs on CARES Act Relief for Student Loan Borrowers
student loans

FAQs on CARES Act Relief for Student Loan Borrowers

Here’s how to know if you qualify – and how you should take advantage.
September 21, 2020
A Step-by-Step Guide to Being an Estate Executor
retirement

A Step-by-Step Guide to Being an Estate Executor

Whether you’re planning ahead for your own heirs or have been asked to serve as an executor of an estate for someone else, it pays to understand what …
September 17, 2020
How to Finance Home Schooling Your Children
family savings

How to Finance Home Schooling Your Children

Kiplinger.com web editor Andrea Browne Taylor joins the Your Money's Worth podcast for a discussion on the financial pros and cons of homeschooling yo…
September 15, 2020