Coronavirus fears cut student loan rates
The interest rates on federal undergraduate, graduate and parent PLUS loans issued after July 1 are tied to the 10-year Treasury rate in the May auction, which will be held on May 12. The 10-year Treasury was pushed back recently over fears that the coronavirus panic continues to weigh on the economy. If the 10-year Treasury remains at or below current levels – which seems very likely – the undergraduate loan rate would be around 2%. Graduate students would pay around 3.5%, while the parent PLUS loan rate would be less than 4.5%.
This is a steep drop from a year ago when rates were 4.53% for undergraduate loans, 6.08% for graduate loans and 7. 08% for PLUS loans.
Federal loan rates are fixed for the term 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 to refinance a private student loan where interest rates have fallen to 3% for a 10-year fixed rate loan, explains Travis Hornsby, founder of Student Loan Planner, which helps borrowers manage their student loans.
However, these low rates are usually limited to high income borrowers with good credit. And when you refinance a private loan, you forfeit some of the benefits of federal loans, such as forbearance or deferral if you run into economic hardship.
If you already have a private student loan, however, there’s no downside to refinancing yourself into a lower rate loan, says Hornsby. Lenders don’t charge closing costs like mortgages do, and some will even offer a bonus to new borrowers, he says.
Even if you are 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 has led to hundreds of colleges and universities sending students home, President Trump has announced his intention to temporarily waive interest on federal student loans. The waiver will not reduce the borrowers’ monthly payments, as these payments will go towards the principal of the loan. It is also not known how long the waiver will last and whether interest will be added to the loan at a later date.
But if you have to request a forbearance, the waiver could save you real money. Normally, interest accrues while a student loan is forborne, but this will not happen if the interest on the loan is waived.