The Federal Reserve slashed the Federal Funds Rate by 1.0% percentage point to a target range of 0.00% to 0.25% on Sunday, March 15, 2020. The Federal Reserve will also use quantitative easing to bring the effective interest rate below zero.
This will cause the interest rates on federal and private student loans to drop to record lows.
Interest rates on federal student loans will likely decrease to about 2% for undergraduate Federal Direct Stafford loans, about 3.5% on graduate Federal Direct Stafford loans and about 4.5% for Federal Direct Grad PLUS and Federal Direct Parent PLUS loans for new loans first disbursed on or after July 1, 2020.
Interest rates on federal student loans are fixed for the life of the loan.
The previous record low for interest rates on federal student loans was set in 2005, when interest rates dropped to as low as 2.875%.
Borrowers who have existing federal student loans cannot refinance them into new federal student loans to take advantage of the new interest rates.
Borrowers can refinance federal student loans and fixed-rate private student loans into new fixed-rate private student loans to benefit from the record low interest rates.
Borrowers who refinance federal student loans into private student loans lose the superior benefits of federal student loans, such as death and disability discharges, longer deferments and forbearances, income-driven repayment and loan forgiveness options.
Interest rates on new private student loans may drop to as low as 2.8% on fixed-rate private student loans and to as low as 1.4% on variable-rate private student loans.
Interest rates on private student loan refi may decrease to as low as 1.9% on fixed-rate private refinance student loans and to as low as 0.50% on variable-rate private refinance student loans. Consider the pros and cons of refinancing, what’s required for approval and how to choose a lender for refinancing.
It will take one to three months for the new interest rates on private student loans to fully phase in.