Laurel Road: How Fed Rate Changes Affect Your Student Loans
NEW YORK, May 19, 2020 (Newswire.com) - The federal funds rate, aka the Fed rate, is the interest rate set by the Federal Open Market Committee (FOMC) that guides the rate at which banks borrow and lend reserves to each other.
If you’re not a large American bank, it might not be clear how that matters for you at all. But the Fed rate has a powerful influence on the economy at large. A low Fed rate could drive market rates lower, incentivizing businesses to borrow money, which can help companies find lower cost financing for new business initiatives. The goal is to stimulate business during an expected slower-than-normal economy. It also serves as a response to how the Federal Reserve plans to guide monetary policy for the overall economic health of the country. The Fed rate will generally rise during boom economies to stop inflation and decrease during recessions and depressions.
Why you should care about the federal funds rate
Recently, the Fed rate dropped to 0.00-0.25%1, which is the lowest since 2015, and it could remain that low for the foreseeable future. While this Fed rate cut is a reaction to the overall financial difficulties caused by the coronavirus pandemic, people can benefit from these low interest rates when it comes to their own personal debt, meaning mortgages, credit card bills — and student loan debt.
Interest rates on fixed-rate private student loans have dropped to their lowest rate in over a year, so if you’ve been considering student loan refinancing, now could be the moment to explore your options.
Understanding your loan: Federally backed or private? Fixed rate or variable rate?
The impact the low Fed rate will have on your loans depends entirely on what kind of loans you have.
Payments and interest on federal student loans have been automatically paused by the CARES (Coronavirus Aid, Relief, and Economic Security) Act until September 30. These federally-backed loans include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
If you have private student loans, they’re not covered by the CARES Act protections. If your loan is fixed rate, that means that your loan won’t be automatically impacted by the changing economy and will continue at your current interest rate.
Variable rate loans might see a decrease in their interest rate if the federal funds rate remains at such a low level. However, if you are trying to take out a new loan, it’s important to note that the variable interest rate that you qualify for isn’t based solely on external market factors, but also personal factors such as your credit score.
The bottom line: Why now could be the perfect time to refinance
With fixed-rate interest on student loan refinancing reaching new lows, it’s possible to secure a low interest rate that will stay in place even after the economy rebounds. While you could get a lower interest rate, the tradeoff for borrowers with federal loans is that you'd be giving away the ability to use federal income driven repayment programs, student loan forgiveness or other federal benefits.
It’s important to think about refinancing strategically and compare your options. Be sure to thoroughly research any associated fees that come with refinancing loans, and weigh those against the money you’ll save with a lower interest rate in both the short and long term.
However, if you have private loans, there’s a good chance you could save money in both the short and long term by taking advantage of this moment to refinance.
Laurel Road is a brand of KeyBank N.A., member FDIC.
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Source: Laurel Road
Categories: Financing and Student Loans