Student Loan Interest Rates Are “The Lowest Ever” – Should You Refinance?

Interest rate for some student loans are at their lowest for decades and, in some cases, never. Cody Hounanian, Program Director at Student Debt Crisis, Noted that these interest rates are the “lowest rates in history”.

Can – and must – student loan are borrowers taking advantage of these historically low interest rates? As is often the case when it comes to student loans, it depends.

Historically low student loan interest rates

Federal student loan interest rates are set by Congress and are tied to Treasury auctions. Due to the recent economic collapse associated with the coronavirus pandemic, interest rates across the board are at record highs.

Following the latest Treasury auction, the rates for new federal student loans issued between July 1, 2020 and June 30, 2021 will be 2.75% for undergraduate Stafford loans, 4.3% for loans Stafford graduates and 5.3% for Federal PLUS loans. These rates are well below average.

But these new low interest rates only apply to New federal student loans. Borrowers who already have existing federal student loans are stuck with their current interest rates. Under current law, there is no mechanism for refinancing federal student loans within the federal system to take advantage of these new lower rates. So while the lower interest rates benefit borrowers who will be in school in the 2020-2021 school year, they do nothing for current federal student loan borrowers who are in the process of being repaid.

Private student loan refinancing

Student loan borrowers have the option of refinance existing student loans through a private student loan program. Interest rates aren’t just historically low for federal student loans; they are also low for other consumer credit products, such as home loans and private loans (although actual rates vary from lender to lender).

A lot private student loans that have been disbursed over the past decade have high interest rates, in some cases exceeding 9-10%. Refinancing these private student loans with a lower fixed interest rate loan could save these borrowers significantly over time, and it could be a good option for these borrowers.

But the refinancing federal student loans through a private student loan carry serious risks. Federal student loans provide protections for consumers such as discharge on death and disability, generous deferral and forbearance options, and the right to remedy default. They also have access to programs such as income contingent repayment and loan cancellation, which are generally not available for private loans. By refinancing federal student loans with a private student loan, borrowers could get a lower interest rate, but they would forgo these program options and consumer protection. Borrowers cannot convert a private student loan back to a federal student loan after refinancing.

Related: How to refinance student loans in 2020

In addition, under the CARES Act, many federal student loans currently have an effective interest rate of 0%, since interest has been suspended. While this is only a temporary reduction in interest rates, there is little reason for federal student loan borrowers covered by the CARES Act to refinance with a private lender right now because they would lose. this advantage of temporary interest. As the economic turmoil and pandemic continues, it is possible that Congress expand and expand the protections of the CARES law.

About Cheryl Viola

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