The federal funds rate, which is what banks and other depository institutions pay to lend each other money (on an overnight basis in most cases) is expressed as an interest rate. Due to the recent COVID-19 pandemic, spike in unemployment, and fears of a recession, the Federal Bank has reduced to this rate to 0.25 which is 2.25 percent less than it was a year ago. These types of changes can have an effect on your student loans, depending on your situation.
Interest Rate on Student Loans
The interest rate on student loans will vary based on whether it is a federal or private student loan. Looking at federal student loans first, each type of federal student loan has a fixed interest rate. That means that the rate remains the same for the life of the loan.
The government determines whether the interest rate changes each year on July 1st. They look at trends in the economy, stock market, and the federal funds rate is factored into this decision in a certain way – the rates are based on the 10-year Treasury notes plus a fixed increase. Hence, factors like a change in the federal funds rate could have an influence on what the 10-year Treasury yield is.
Here are the current interest rates on each type of federal student loan.
- Direct Subsidized/ Direct Unsubsidized loans (Undergraduate) – 4.53 percent
- Direct Unsubsidized loans (Professional or Graduate) – 6.08 percent
- Direct PLUS loans (Parent, Professional, or Graduate) – 7.08 percent
Private students are offered by banks and other lenders who have their own underwriting requirements to be approved for a loan. Factors like your credit score, credit history, the degree you’re seeking, and more might be considered. Since these lending models vary by lender, your interest rate if you’re approved for a private loan is different.
Current and Future Student Loan Borrowers
Since the interest rate on federal student loans is fixed, there’s no changes that occur to these types of loans when interest rates increase or decrease. The only exception to this if you have a federal student loan from before 2006 when there were student loans offered by the federal government with variable rates.
If you are planning on taking out a federal student loan and the interest rate is reduced after July 1, then you get the benefit. Lower interest rates mean that your monthly student loan payments are also lower.
Your private student loan lender may have given you a choice of a fixed or variable interest rate when you took out the loan. If you chose a variable rate, changes in the federal funds rate can affect the lender’s interest rate. Many lenders use the benchmark interest rate based on the London Interbank Offered Rate, LIBOR. This rate responds to adjustments in the federal funds rate since it is pegged to it. So if you have a current private student loan with a variable interest rate, you will likely see a reduction in your interest rate and monthly payment amount.
For borrowers who want to lower the interest rate on their current student loans, refinancing might be an option. The best choice always depends on your situation and knowing all the options will equip you to make the best decision.
Understanding and navigating through the student loan world can be complicated. Student Loan Medix is here to help you with expert advice. Call us today for a free, no obligation consultation at 480-676-2889. You can also reach us at [email protected]