Student Loans & COVID-19
March 18th, 2020
COVID-19 could drastically slash your interest if you currently owe student loans or if you plan on borrowing money for school. Knowing what actions to take could save you a huge sum of money.
How low can federal student loan interest due to the COVID-19?
According to the CBO, here is the margin added to the 10-year Treasury rate, which determines what your student loans will cost each year:
• Stafford Subsidized and Unsubsidized for Undergrads: 2.05%
• Stafford Unsubsidized for Graduate Students: 3.60%
• Direct Grad PLUS and Parent PLUS: 4.60%
Assume the all-important Treasury auction happened today and yielded 1%. Here’s the cost for each kind of federal student loan that would result (1% for the 10-year Treasury added to the margin listed above):
• Undergrads: Stafford 3.05%
• Grad students: Stafford 4.60%
• Grad PLUS: 5.60%
• Parents PLUS: 5.60%
These rates reflect the lowest federal student loan interest in at least a decade.
If Coronavirus fades, student loan interest costs rise
If investor fears from the virus go away, then Treasury bond yields would likely move higher.
We all want the Coronavirus to go away as soon as possible. But if we look at that possibility solely through the lens of your student loan debt, it would actually be a negative for next years’ student loan borrowing costs — particularly, if it happened around May 2020 when student loan interest rates get set.
This is out of your control, but you should watch what interest rates do in early May if you plan to borrow a lot for the following academic year.
Coronavirus would make federal student loans attractive compared to private loans
Parent PLUS interest rates are approximately 7% until June 30, 2020. Many private lenders advertise their lowest APR for undergraduate loans in the mid 5% range, and that’s with a parent cosigner for a student.
Instead, starting next fall, you might be able to take out a Parent PLUS loan at 5.6% with superior borrower protections and income-driven repayment options.
Many undergraduate students might want to consider claiming themselves as independents on their own tax return simply to qualify for additional Stafford Subsidized loans at 3% interest.
You can generally receive an extra $4,000 to $5,000 in additional low-interest loans yearly through this strategy.
Clearly, with low federal student loan interest rates, you’d focus on borrowing as much as you can in federal student loans instead of private loans.
Coronavirus is saving current student loan borrowers a lot of money with refinancing.
While rates have fallen enormously, it’s not a forgone conclusion that this would immediately show up in the form of lower student loan refinancing rates.
Lenders need a combination of low rates with low credit risk to give you a great deal.
The stock market took a hit with Coronavirus, but not enough of a hit for investors to truly worry yet.
Right now, this “perfect storm” combination of low rates and low credit risk is happening as most lenders still have confidence in the economy.
So if you owe less than what you earn, you should refinance your federal student loans right away if you work in the private sector.
If you have private student loans, know that you can refinance them a second, third, or even fourth time if you can find a lower rate.
Consider taking action with your student loans in response to Coronavirus.
If you plan to pursue forgiveness under an IDR plan or PSLF, then you do not need to change your plan because of this virus.
However, if you plan to pay off your student debt long-term, you should definitely shop offers from at least two or three lenders for lower interest, and greater savings than the deal you have now.
If you need to borrow for your education next year, make sure to take out only federal student loans unless there’s a compelling reason to use private student loans. The rates for federal student loans will just be too low to justify using private financing sources.