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.

(Image credit: DNY59)

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.

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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.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

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.