The Federal Reserve’s emergency interest-rate cut March 15, aiming to calm an economy disrupted by the coronavirus, could pave the way for the lowest federal student loan rates in history, as well as a possible opportunity for those looking to refinance student debt.
Among the effects the Fed’s easing could have:
- Rates for all federal student loans could drop by 1.6 percentage points if Treasury yields hold steady — or more if the yields move lower.
- Under this scenario, federal direct loan rates would fall to an estimated 2.90% for undergraduates, from 4.53%, while parent PLUS and grad PLUS rates could hit 4.45%, down from 6.08% currently.
- If student loan rates do go down by 1.6 points, borrowers could save a collective $72.7 million a month in interest payments on their 2020-21 loans (assuming they all stayed on a 10-year repayment plan).
- The impact could be especially significant for students who accrue interest while in forbearance or deferment.
- Rates to refinance student loans as private debt may also slide to historic lows, offering a chance for some borrowers to cut their interest costs.
Read on to see how this will impact your own loans. Specifically, let’s look at the following topics:
Federal student loan rates on pace for record low
Future federal student loan borrowers: What lower rates mean for you
Current federal and private student loan borrowers: What lower rates mean for you
Federal student loan rates on pace for record low
Undergraduates were already projected to see interest rates on their federal direct loans drop from 4.53% to an estimated 2.90% for the 2020-2021 school year, based on the Department of Treasury’s March 11 auction.
Federal student loan interest rates are scheduled to be set in May based on Treasury yields, and then finalized by Congress.
Previously, the all-time low for rates on direct subsidized student loans was 3.40%, offered between 2011 and 2013. Direct unsubsidized loan rates reached a low of 3.76% in the 2016-2017 academic year.
The March 15 reduction to the Federal Reserve’s benchmark rate target — known as the federal funds rate — could send government student loan rates even further below the 3.00% threshold for undergraduates.
Graduate students and parents, meanwhile, could see similarly historic lows on the federal loans available to them for the 2020-2021 school year.
| Federal Student Loan Interest Rates on Track to Drop to Lowest Level Ever for Next Academic Year | |||
|---|---|---|---|
| May 2019 | Mar 2020 | ||
| Treasury Auction Yield | 2.48% | 0.85% | |
| Base to Which Auction Rate is Added | Actual Rate for 2019-20 AY | Potential Rate* for 2020-21 AY | |
| 2.05 | Undergraduate loans (Subsidized and Unsubsidized) | 4.53% | 2.9% |
| 3.6 | Graduate loans (Unsubsidized) | 6.08% | 4.45% |
| 4.6 | PLUS loans (Parent & Grad) | 7.08% | 5.45% |
| * Based on 10-year TREASURY note note auction in March 2020. Final rates are set for the coming academic year based on the auction in May, thus 2020-21 may be higher or lower based on that auction. | |||
Future federal student loan borrowers: What lower rates mean for you
Assuming future borrowers repay their debt on a 10-year standard repayment plan, LendingTree analysts estimate that these new rates would save borrowers roughly $72.7 million per month in accruing interest during the coming academic year (and for as long as rates stay low).
Of course, borrowers that take longer than a decade to repay their loans would incur even more savings — and in fact, seven in 10 borrowers do need longer than 10 years, according to our research.
Basically, every month that you’re in repayment on a loan at, for example, 2.90% instead of 4.53%, you would stand to benefit.
| Estimated total U.S. monthly payments for federal student loans | |||||
|---|---|---|---|---|---|
| Loan Program | 2019-20 AY | 2020-21 AY | Monthly Difference | Annual Difference | Lifetime (10-Year) Difference |
| Undergraduate | $420,061,926 | $386,651,663 | $33,410,263 | $400,923,154 | $4,009,231,542 |
| Graduate (Unsubsidized) | $298,091,458 | $273,617,446 | $24,474,012 | $293,688,144 | $2,936,881,442 |
| Graduate PLUS | $122,280,672 | $112,410,976 | $9,869,696 | $118,436,354 | $1,184,363,536 |
| Parent PLUS | $149,316,208 | $137,974,018 | $11,342,190 | $136,106,280 | $1,361,062,798 |
| Total | $989,750,264 | $910,654,103 | $79,096,161 | $949,153,932 | $9,491,539,318 |
| Assumes standard 10-year payment plan and same amount borrowed per student as 2018-19 academic year. | |||||
This also means that if you’re in a deferment or forbearance agreement that allows interest to accrue and get added onto your balance, the savings could be significant.
Say a college senior borrows $5,000 in federal loans for the 2020-2021 academic year. Also, assume they qualify for an unemployment deferment that pauses their repayment for three years. At 2.90%, their balance would grow by $435 over the three-year period, according to our student loan deferment calculator. But at 4.53%, it would increase by $679, or an additional $244.
Also, the higher the loan amount, the more savings would be generated. That means graduate students and parents, who are allowed to borrow up to the cost of attendance, could well receive the greatest benefit among all school-loan borrowers.
Take a look at what the lower rates would mean to your monthly payment, as well as your annual costs …
| Estimated average monthly payments for federal student loans | |||||
|---|---|---|---|---|---|
| Loan Program | 2019-20 AY | 2020-21 AY | Monthly Difference | Annual Difference | Lifetime (10-Year) Difference |
| Undergraduate | $46 | $42 | $4 | $44 | $443 |
| Graduate (Unsubsidized) | $203 | $187 | $16 | $191 | $1,914 |
| Graduate PLUS | $287 | $265 | $22 | $266 | $2,655 |
| Parent PLUS | $184 | $170 | $14 | $170 | $1,700 |
| Assumes standard 10-year payment plan and same amount borrowed per student as 2018-19 academic year. | |||||
Current federal and private student loan borrowers: What lower rates mean for you
If you’ve already borrowed federal student loans, the 2020-2021 rate won’t affect your repayment. Your loans already have their interest rates. However, that doesn’t mean you can’t profit from historic low rates.
In particular, the fed funds rate cut could make student loan refinancing an even more appealing option.
Many refinancing companies tie their rate offerings to Libor, which is influenced by the fed funds rate. When it goes down, so do quotes from banks, credit unions and online lenders.
A handful of student loan refinancing companies have promoted variable rates below 2.00%. If you have higher-rate federal loans — and are willing to yield their government-exclusive repayment protections — refinancing is one of the only ways to significantly reduce your average interest rate.
Refinancing private loans, meanwhile, is an even simpler equation because they’re already private. Here, so long as your new private lender has similar policies and services to your current lender, you have little to lose by looking into refinancing. Of course, private lenders can vary a lot in terms of what they offer, so if you take this route, check out our tips on how to shop around.
