May 11, 2020

Federal student loan interest rates could drop to lowest levels ever: Here’s why

Federal student loan interest rates could drop to lowest levels ever: Here’s why


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A bright spot for future college students amid the coronavirus crisis is that rates on student loans may fall to a record low for the coming year, which could save borrowers a lot of money throughout their lifetimes.

The Treasury is set to auction off 10-year Treasury notes on Tuesday, which will allow Congress to determine federal loan rates for the 2020-2021 school year. It does so each year in May.

“This is sort of a silver lining to the bleak economic environment we’re in,” Andrew Pentis of Student Loan Hero told FOX Business. “We’re anticipating record lows on these federal student loan interest rates.”

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There is a formula to determine what the rate will be for the coming year, which is the 10-year Treasury yield plus a fixed rate. For direct unsubsidized loans for undergraduates, for example, it is the 10-year Treasury yield plus 2.05 percent (capped at 8.25 percent). The fixed-rate for direct unsubsidized loans for graduates is 3.6 percent, while rates are capped at 9.5 percent.

The yield on the 10-year Treasury has fallen as the coronavirus pandemic increased economic volatility and sent investors seeking out safe-haven investments. The Federal Reserve also cut its benchmark federal funds rate to nearly 0 percent in two emergency March sessions.

Pentis said borrowers could save a collective $73 million a month in interest on their 2020-2021 academic year payments (assuming a 10-year repayment plan), if rates go down by 1.6 points, which is expected.

Lower rates will be particularly beneficial for people who defer payments because interest will accrue at such low levels, Pentis added.

The rates will affect loans issued after July 1, through June 30, 2021.

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It will not therefore affect current students whose rates have already been determined. Currently, the rate on subsidized and direct unsubsidized Stafford loans made to undergraduates is 4.5 percent.

The auction will also not affect private loans, or rates for people with student loan debt. The bright side for these individuals, however, is that declining interest rates has made overall borrowing cheaper.

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The coronavirus pandemic has put pressure on American families, and it has caused uncertainty for current and prospective college students who were not included in the CARES Act. Likewise, Pentis said many high school graduates are considering taking a gap year or attending community college as a means to lower risk and cut costs.

The common thread for all students, however, is that they should fill out a FAFSA, because, as previously reported by FOX Business, most will qualify for some form of aid.

Pentis added that students should “exhaust all other options,” like scholarships and grants, before resorting to student loans.

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