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Editor’s note: This story has been updated to provide new information on relief being provided to federal student loan borrowers to help them cope with the economic impacts of measures being taken to contain the spread of the coronavirus.
An emergency rate cut by the Federal Reserve to ward off the economic impacts of the coronavirus, coupled with an investor “flight to safety” into government bonds, means it’s getting cheaper to take out and refinance mortgages and student loans.
Many homeowners have rushed to refinance their mortgages after seeing headlines announcing that mortgage rates hit record lows during the week ending March 5. But rates are also falling for borrowers taking out or refinancing student loans.
Federal student loans provide borrower protections that can be important during times of economic uncertainty, including access to income-driven repayment plans and the right to place loans in deferment or forbearance.
As part of the government’s response to the coronavirus, interest rates on federal student loans owned by the government have been reduced to 0% through Sept. 30, and loan servicers have been instructed to place loans in administrative forbearance and stop collecting payments for six months.
Until there’s more clarity on the full impact of the coronavirus crisis and the aid that will be made available, federal student loan borrowers may want to postpone a decision on refinancing.
Student loan refinancing rates are dropping
Investors are seeking safe returns in investments including government bonds, mortgage-backed securities, and asset-backed securities (ABS) backed by student loans. Increased demand for these investment products results in lower cost of funding for lenders — and reduced interest rates for many qualified borrowers.
The lowest rates are reserved for borrowers with very good credit scores, taking out loans with the shortest repayment terms and authorizing automatic payments.
During the first 10 days of March:
Prequalified rates selected by borrowers on 10-year fixed-rate loans averaged 4.62% APR, down 1.43 percentage points from a July 2018 peak of 6.05%
Rates on 5-year variable-rate loans averaged 3.44% APR, down 1.24 percentage points from their September 2018 peak of 4.68%
Savings from refinancing student loans
A borrower repaying the average graduate school debt of $84,300 over 10 years at 6.36% interest — the average rate for grad school loans in recent years — could save:
- $22,268 by refinancing into a 5-year variable rate loan
- $8,719 by refinancing into a 10-year fixed-rate loan
|Monthly payment||Total interest charges||Savings|
|Existing loan (6.36%)||$951||$29,846||N/A|
|5-year variable (3.44%)||$1,531||$7,578||$22,268|
|10-year fixed (4.62%)||$879||$21,127||$8,791|
Federal student loan rates also set to fall
With fears of an economic slowdown driven by the spread of COVID-19 sending stocks plummeting, investors have been piling into safer investments like government bonds. That’s driven bond prices up, and yields down.
That’s good news for students headed to college this fall, because rates on federal student loans are adjusted once a year, to account for changes in the government’s cost of borrowing.
The benchmark rate for federal student loans — the 10-year Treasury note — had been hovering between 1.5% and 2% since last summer, but briefly hit an all-time low of 0.38% on Monday, March 9.
A government auction of 10-year Treasury notes set for Tuesday, May 12 will determine rates on new federal student loans taken out during the 2020-2021 academic year. If that auction were held at Monday’s low 10-year Treasury yield of 0.38%, federal student loans interest rates would drop sharply on July 1, to record lows:
- Undergrads: 2.43%, down from 4.53% today
- Grad students (unsubsidized direct loans): 3.98%, down from 6.08% today
- Grad and parent PLUS loans: 4.98%, down from 7.08% today
At those rates, the average student could save $789 to $3,287 in interest charges on loans taken out during the 2020-2021 academic year and repaid over 10 years. This is the potential savings for one year of borrowing, spread out over 10 years.
Graduate students and parents taking out federal PLUS loans stand to save the most, since they borrow more money and pay higher interest rates.
The estimated average savings for each group of borrowers would be:
- Undergraduates: $789 in interest charges on loans they take out in 2020-21, based on average annual borrowing of $6,660
- Parents taking out PLUS loans: $2,181 based on $17,220 in average annual borrowing
- Graduate students: $2,373 in interest charges on unsubsidized direct loans, on average, based on annual borrowing of $19,250
- Graduate students taking out PLUS loans: $3,287 based on average annual borrowing of $25,950
Yields on 10-year Treasury notes have bounced back some from their March 9 low. But as long as they stay below 2.48% on May 12 — last year’s benchmark — rates on federal student loans taken out for the 2020-21 academic year will go down on July 1.
If the 10-year Treasury yield stays below 1.35% at the May 12 auction, rates on all federal student loans, including those for undergraduates, will be at a new low. If the 10-year Treasury yield stays below 1.71%, rates on unsubsidized federal student loans for graduate students, and PLUS loans for parents and grad students, will be at record lows.