A College Silver Lining

It has been a frustrating time for households with college-age students. Finishing last semester online was a jolt, and now the trend is for schools to keep campuses closed through at least this fall and stick with online-only teaching, which I talked about last week.

So, I want to make sure you know about some very good news: the interest rate on federal loans for the coming school year will be at record lows.

Federal student loan rates are changed once a year and are based on a formula that is tied to the 10-year Treasury rate. As you likely know, the interest rate on the 10-year Treasury is now very low. That’s not good for what you are earning on your emergency savings account, but it sure helps with borrowing.

And federal student loans have never been so inexpensive.

On July 1, borrowing for the coming 2020-2021 academic year will be at the following interest rates:

- Undergraduate Federal Stafford loans: 2.75% (down from 4.53%)

- Graduate Federal Stafford loans: 4.3% (down from 6.8%)

- Parent and Graduate PLUS loans: 5.3% (down from 7.08%)

As you can see those are some big savings. And given that PLUS loans are far more expensive than undergraduate federal loans (they also have a 4.24% origination fee), I want to repeat advice I always give: your kid borrows first. And parents only borrow if they have no credit card debt, have an eight-month emergency fund and are on-track with retirement savings.

Those rates are only for the borrowing you will do for the coming academic year. Come July 1, 2021, rates will be set again based on where the 10-year Treasury rate is next year. Also keep in mind, those low rates do not apply to existing loans you have taken out in years past.

I have some thoughts for those of you done with school (or done with sending your kids to college) and who have multiple loans.

You can consolidate all your federal loans into one new federal loan, but the interest rate will simply be based on the combined rates (and borrowing) from when each of those loans was originally made. There is no way to take advantage of today’s low rates when you consolidate into one federal loan.

The only way to roll together all your loans and have a shot at getting a good rate based on today’s low rates is to move your loans into a private student loan offered by a bank, credit union or online lender. For borrowers with a very strong FICO credit score and financial picture, you may find you can lock in rates today that are one or more percentage points lower than what you’re currently paying on federal student loans.

There are some risks to doing a private-loan refinance, but I want you to be aware of the option. It may make the most sense for parents with a good FICO credit score and higher-rate PLUS loans.

My rules for considering refinancing your federal loans into a private student loan:

1. You qualify for a great fixed interest rate for the life of the loan. Private loans can be fixed rate or adjustable rate. You are never to take out an adjustable loan. To get a low interest rate you will need a strong FICO score, typically above 700. 

2. You don’t need a cosigner.

3. You aren’t going to extend the pay-back period. It should be a goal to pay back your loans within 10 years. If you have already paid five or more years and then take out a new 10-year loan, you’ve just added to your time in debt.

4. The private loan document clearly spells out that in the event you die before finishing repayment your survivors will not be required to pay back the remaining balance. It’s so important to understand that “discharge at death” is a feature of all federal student loans. But not all private loans have the same protection. Get written confirmation in the loan documents, not some off-hand chat or email with customer service, that your private loan will be discharged (forgiven) if you die before the loan is paid off.