The Federal Reserve did student loan borrowers a favor last week. Fed policymakers voted to leave interest rates at 0-0.25% following a two-day meeting in Washington. Since the market meltdown and financial crisis, low-interest rates have been the norm over the last seven years.
Low-interest rates are often praised for helping consumers save money during times of economic uncertainty. Low mortgage, auto, and credit card interest rates have helped consumers save money. However, you don’t often hear student loans mentioned in conversations regarding low-interest rates.
Student loans are a giant issue in the United States. In fact, student loan debt is the second largest form of consumer debt in the United States. There are currently 43 million Americans working to repay over $1.2 trillion in student loan debt. These same 43 million Americans should be thanking Fed policymakers for keeping new and refinanced student loan interest rates low.
Lower interest rates equate to lower student loan payments and savings for student loan borrowers.
Since Janet Yellen stepped into her position as Fed chair, Yellen has kept the Federal Reserve down its dovish path. Nine out of the ten Federal Open Market Committee (FOMC) members voted to keep rates unchanged.
Yellen has given hints that she expects rates to be raised by the end of 2015. The economy is improving and some analysts are predicting the Fed to make a hawkish decision in December.
Student loan borrowers should be watching Yellen’s decision closely. Even slightly higher interest rates could startle student loan borrowers.
Each May, Congress votes to set federal student loan interest rates for the next academic year. Federal student loans are loans issued by the Department of Education. Federal student loan interest rates are determined by the final auction price of the 10-year treasury note in May.
If the Federal Reserve begins to raise interest rates at the end of this year, or early next year, new student loan borrowers should expect to see federal student loan interest rates rise too.
Today, federal student loan borrowers pay 4.29% for undergraduate Stafford loans, for the 2015-2016 year, down from 4.66% on loans given out during the 2014-2015 school year. Private student loan borrowers would also be affected.
Private student loans are issued by private lenders, not the Department of Education. These loans have both variable and fixed interest rates. New borrowers and those currently holding private student loans, should also expect to see the total costs of their debt to rise.
Student loan refinancing and consolidation has become a popular topic and loan product over the last couple years. Many student loan borrowers with high-interest debt can benefit from private student loan consolidation and refinancing. However, if interest rates were to rise dramatically, many borrowers might miss out on the potential savings.
Today, private student loan consolidation and refinancing rates are as low as 1.90% at many lenders including SoFi. SoFi, the largest private student loan consolidation and refinancing lender offers a variety of rate types, term lengths, and low-interest rates to borrowers looking to refinance student loans.
Over the last year, a number of student loan consolidation lenders have entered the market. Each lender offers a different platter of rates and terms. Here is a pretty complete list of the different student loan consolidation and refinancing lenders.
Only a small fraction of the $1.2 trillion in outstanding student loan debt has been refinanced so far. Many student loan borrowers are completely unaware that student loan refinancing is even an option. The Federal Reserve has kept interest rates low since the concept of student loan refinancing emerged.
We estimate that there are $400 billion in student loans that would benefit from refinancing with a private student loan lender. If interest rates begin to tick higher, private student loan consolidation and refinancing rates would rise too.
Janet Yellen is buying time for student loan borrowers procrastinating over refinancing. If you have strong credit, good income, and a history of on-time repayment you should give refinancing a try before the Fed’s next meeting.
Higher education is expensive. Higher interest rates would make higher education even more expensive for the 7 out of 10 graduates who finance their education. Current student loan borrowers should be watching the Federal Reserve too. Higher interest rates would make student loan refinancing a less attractive option for the millions of Americans who could benefit
Nate Matherson is the CEO of LendEDU. LendEDU is a marketplace for student loans and student loan refinancing.