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%.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.
-
Come as You Are: Wealth Management for Gen X
Gen X is stuck in the middle of kids and aging parents, but retirement's not far off. Time to prioritize, with help from Nirvana, The Eagles and David Bowie.
By Alvina Lo Published
-
New Job? Time to Start a 401(k) Plan
Whether you're starting a new job or have never opened a 401(k) account, it's time! Here's how to open an account in five steps.
By Adam Shell Published
-
403(b) Contribution Limits for 2024: Good News for Teachers
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Last updated
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Last updated
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Five Ways to a Cheap Last-Minute Vacation
Travel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
By Vaishali Varu Last updated
-
How to Figure Out How Much Life Insurance You Need
insurance Instead of relying on rules of thumb, you’re better off taking a systematic approach to figuring your life insurance needs.
By Kimberly Lankford Last updated
-
Amazon Big Deal Days Is Coming! We’ve Got All the Details
Amazon Prime To kick off the holiday season with a bang, Amazon Big Deal Days runs Tuesday, October 8 and Wednesday, October 9.
By Bob Niedt Last updated
-
How to Shop for Life Insurance in 3 Easy Steps
insurance Shopping for life insurance? You may be able to estimate how much you need online, but that's just the start of your search.
By Kaitlin Pitsker Published
-
Five Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Mortgage rates are high this year, but you can still find an affordable loan with these tips.
By Daniel Bortz Last updated