The Coronavirus has triggered fear for many of us. We want to keep our families safe and healthy and protect them from disease. But it also can cause fear for our financial future. Here is how coronavirus may affect your college savings and student loans:
How Coronavirus Can Impact College Savings
The increase of cases developing of COVID-19 coronavirus has caused damage to the stock market leading to a market correction. Investors are worried about the coronavirus causing a recession due to its interference with supply chains and international travel.
Any 529 saving plans with high foreign stock exposure may be disproportionately affected.
The stock market generally undergoes at least three corrections and one bear market lasting more than one month in any 17-year period and it’s been 9 years since the last such correction. A stock market correction occurs when stock prices drop by 10% or more. A bear market occurs when stock prices drop by at least 20%.
Don’t panic – markets go up and down. It’s all part of it. Resist the urge to make a dramatic decision. Selling now will just lock in your losses and cause you to miss out on the recovery.
How Coronavirus Can Impact Student Loans
The Federal Reserve Board might cut interest rates by a quarter of a percentage point or two if the coronavirus affects the world economy. This could cause interest rates to drop, including on federal student loans. [Editor’s Note: The Federal Reserve cut interest rates by half a percentage point on March 3, subsequent to publication of this article.]
New interest rates on federal student loans will be set in May for the 2020-2021 academic year.
If interest rates do drop for federal loans, this could mean new borrowers can end up saving thousands on interest.
Mark Kantrowitz, Publisher and VP of Research for Savingforcollege.com, was already predicting that interest rates on federal student loans will drop by 0.75% to 1.0% in 2020-2021, even before fear of the coronavirus started affecting businesses.
If the Federal Reserve Board cuts interest rates, the interest rates on new federal student loans might drop by 1.0% to 1.5%, depending on the timing of the rate cuts.
The interest rate reduction will not affect existing federal student loans. You also cannot borrow next year’s federal student loans early.
The interest rates on variable-rate private student loans will react more quickly, typically phasing in the new interest rates over a one- or three-month period.
Borrowers of federal loans could refinance their federal student loans into private student loans. But, even with the coronavirus-triggered interest rate reductions, federal student loans might still have lower interest rates, unless the borrower has very good credit. Borrowers who refinance their federal student loans will lose the superior repayment benefits of federal student loans. There are pro and cons of refinancing student loans, so consider which is the best choice for you.
Should the coronavirus lead to a recession, this will also impact student loans. Since a recession means higher unemployment rates and lower incomes, this would make repaying student loans even more of a challenge for borrowers. If it ends up negatively impacting your finances, there are ways you could lower your student loan payments, including enrolling in an income-driven repayment plan, applying for a deferment or refinancing student loans for a lower interest rate. Sign up for our free student loan newsletter for expert advice on how to avoid and reduce debt.
Impact on Study Abroad
China and Italy, two of the countries with widespread cases of coronavirus, are amongst the top 10 destinations for U.S. students studying abroad.
Many colleges, including University of Tennessee and University of Colorado, have suspended all study abroad programs in China and South Korea.
Colleges have also suspended study abroad programs to Italy and asked current students abroad to come home. These schools include Syracuse University, New York University and Florida International University.
Parents are also understandably worried about the risk to their children. However, the mortality risk to college-age children is less than a tenth of the overall risk.
The number of students participating in study abroad programs was not significantly affected after SARS in 2003 and MERS in 2012.
How to Prevent Coronavirus
The CDC recommends taking a few key steps for preventing the coronavirus:
- Wash your hands often with soap and water for at least 20 seconds, especially after going to the bathroom; before eating; and after blowing your nose, coughing, or sneezing.
- If soap and water are not readily available, use an alcohol-based hand sanitizer with at least 60% alcohol. Always wash hands with soap and water if hands are visibly dirty.
- Avoid close contact with people who are sick.
- Avoid touching your eyes, nose and mouth.
- Stay home when you are sick.
- Cover your cough or sneeze with a tissue, then throw the tissue in the trash.
- Clean and disinfect frequently touched objects and surfaces using a regular household cleaning spray or wipe.
- Follow the CDC’s recommendations for using a facemask.
- The CDC does not recommend that people who are well wear a facemask to protect themselves from respiratory diseases, including COVID-19.
- Facemasks should be used by people who show symptoms of COVID-19 to help prevent the spread of the disease to others. The use of facemasks is also crucial for health workers and people who are taking care of someone in close settings (at home or in a health care facility).