Coronavirus, or COVID-19, is having an astounding effect on student loans in 2020.
Let me preface this by stating that the human toll of the virus is far more important, as is the greater impact of COVID-19 on the global economy.
That said, I’ll walk you through the interest rate impact if the virus continues to live on for years to come.
The Coronavirus 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 as I’ll show.
As of December 31, 2019, the 10-year Treasury note yielded 1.92%.
As I write this, that same benchmark yield for the economy just went below 1% for the first time in the history of the United States.
Congress sets the rates for student loans for the next year, according to the last 10-year Treasury note auction in May.
If Coronavirus persists, it’s highly likely that the 10-year auction will result in a very low 10-year Treasury rate yield, which would push down borrowing costs for federal student loans for July 1, 2020 to June 30, 2021.
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. Student loan borrowers would save over a billion dollars in interest in the first year alone.
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.
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.
Lenders need a combination of low rates with low credit risk to give you a great deal.
The stock market took a huge hit with Coronavirus. Early on, we saw low refinancing rates. Now we’re seeing high refinancing rates reflecting the economic shut down.
So if you owe less than what you earn, you should eventually refinance your federal student loans if you work in the private sector, but maybe wai until after COVID-19 is over.
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.
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.
Remember, just because you set yourself up to save money during a tragedy does not mean you’re a bad person. You’re just responding to the world around you and making the best decisions for you and your family.
What do you think about the impact of Coronavirus? Either on student loans specifically or the world more broadly? Comment below.