Student Loan Interest Rates Could Hit Record Lows

Summary

Podcast Summary: WSJ Your Money Briefing – "Student Loan Interest Rates Could Hit Record Lows"

Date: March 19, 2020
Host: J.R. Whalen (Wall Street Journal)
Guest: Ann Tergeson (Wall Street Journal reporter)

---

Overview

This episode of WSJ’s "Your Money Briefing" centers on the dramatic drop in student loan interest rates following the Federal Reserve's move to slash short-term rates in response to the coronavirus outbreak. With mortgage rates falling to decade-long lows, the show explores how student loan borrowers stand to benefit, what new rates are expected to be, the difference between federal and private loans, pros and cons of refinancing, and the impact of new relief actions from the government.

---

Key Discussion Points & Insights

Federal Reserve Rate Cuts and Student Loans

• Impact of Rate Cuts: The Federal Reserve’s move to lower short-term interest rates to near zero is expected to send student loan interest rates to potentially record lows.
  • "[Rates] for the upcoming school year will hit record lows just on the basis of the fact that interest rates have declined so much since last year."
    — Ann Tergeson [01:42]

How Student Loan Rates Are Determined and Expected Figures

• Calculation Method: Federal student loan interest rates are based on the yield of the 10-year Treasury note from the May auction (scheduled for May 12th, 2020).
• Projected Rates for 2020-2021:
  • Undergraduate Stafford Loans: ~1.9%
  • Graduate Stafford Loans: ~3.5%
  • PLUS Loans (for parents and some grad students): ~4.5%
    • "For all three, it's about two and a half percentage points lower than where we are now..."
      — Ann Tergeson [02:42]
• Significance: This marks a significant reduction compared to previous rates (e.g., undergrad Stafford loans fell from 4.5% to 1.9%).

Federal vs. Private Student Loans

• Federal Loans: Recommended as the first option due to generally lower rates and greater flexibility in repayment options.
• Private Loans: Suitable mainly for those who need to borrow beyond federal limits (e.g., medical or law students).
  • Private loan rates are determined largely by the borrower's credit score.
    • "If you have a very strong credit score, you may actually get a lower rate on a private loan than you would on a federal loan..."
      — Ann Tergeson [03:03]
• Refinancing: Existing private loan holders might benefit from refinancing as private rates drop.

Should You Refinance Federal Loans?

• Temptation to Refinance: Low interest rates may entice borrowers to move federal loans into private loans via refinancing.
• Key Trade-Offs:
  • Lower Interest Rates (possible money saved)
  • Lost Flexibility: Forfeiting income-based repayment, forbearance (pause payments due to economic hardship/unemployment), and loan forgiveness options.
    • "You have to be very aware of what you're giving up if you refinance into a private loan from federal loans."
      — Ann Tergeson [06:45]
  • In the private market, pausing payments for hardships is typically more limited and not automatic.

Taking Advantage of the Lower Rates

• For Upcoming Borrowers: Opt for federal loans for the new academic year; the rates will be automatically lower.
• For Current Borrowers:
  • Compare current private loan rates to new offers and consider refinancing.
  • Fixed vs. Variable Rates: With rates already very low, fixed rates may provide more security than variable rates if carrying debt for more than a few months.
    • "[If] you're going to have an outstanding debt for more than the next couple of months, you really should be looking at locking in a fixed rate..."
      — Ann Tergeson [04:13]

Credit Score Considerations During Refinancing

• Shopping Around: It’s best to get multiple quotes within a two-week period to avoid lowering your credit score due to multiple hard inquiries.
  • "You want to do that within say, a two week period so that you don't actually create any problems in terms of reducing your credit score."
    — Ann Tergeson [06:51]

Flexibility and Relief Amidst Coronavirus Crisis

• Federal Loans Offer Built-in Flexibility: Existing processes (forbearance, deferment) allow pauses for economic hardship or unemployment.
• Recent Changes: The Trump administration announced suspension of interest accruals on federal loans starting March 13, 2020.
  • "People who have federal loans are supposed to see interest accruals stop as of March 13. This is supposed to be in place until further notice."
    — Ann Tergeson [07:26]
• Distinction from Payment Relief: The suspension means all payments go to principal, paying off loans faster, but does not lower monthly payment obligations.
  • "People are still going to have to pay the same amount. Their monthly payment will remain the same. It's just that that full amount will go towards paying down principal..."
    — Ann Tergeson [08:35]

---

Notable Quotes & Memorable Moments

• On Rate Calculation:
  "Student loan interest rates are pegged to the yield of the ten year treasury note... pegged to the yield of the 10 year treasury note that comes out of the May auction, which is currently scheduled for May 12th."
  — Ann Tergeson [01:42]

• On Refinance Risks:
  "You have to be very aware of what you're giving up if you leave. If you refinance into a private loan from federal loans."
  — Ann Tergeson [06:45]

• On Trump Loan Interest Suspension:
  "According to the Department of Education, loan servicers were supposed to suspend interest as of the date of this announcement, which was March 15. So people who have federal loans are supposed to see interest accruals stop as of March 13th. This is supposed to be in place until further notice."
  — Ann Tergeson [07:26]

• Federal Loan Payment Relief:
  "People are still going to have to pay the same amount. Their monthly payment will remain the same. It's just that that full amount will go towards paying down principal, which enables you to pay off your debt sooner."
  — Ann Tergeson [08:35]

---

Timestamps for Key Segments

• Federal Reserve Rate Cut Overview: [00:36]–[01:07]
• How Student Loan Rates are Set & Forecasted: [01:42]–[02:38]
• Comparison with Current Rates: [02:38]–[03:01]
• Federal vs. Private Loans & Refinancing Discussion: [03:01]–[06:45]
• Impact on Credit Score when Shopping for Loans: [06:45]–[07:14]
• Hardship Flexibility & Interest Suspension Announcement: [07:14]–[08:35]
• Clarifying Suspension vs. Payment Relief: [08:32]–[09:10]

---

Conclusion

The episode delivers timely, practical advice for students and families navigating student loans in the wake of historic Federal Reserve rate cuts. The host and guest break down both the promise and the pitfalls of refinancing, stress the enduring value of federal loan protections, and clarify new relief measures that prioritize principal reduction but do not lower payments. The conversation is grounded, measured, and focused on empowering listeners to make well-informed financial decisions during a period of economic uncertainty.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Advocate for Durbin Marshall Bill]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Advocate for Durbin Marshall Bill]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Representative]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen for the Wall Street Journal. We've told you about how the Federal Reserve has lowered short term interest rates to near zero as a way of softening the economic impact of the coronavirus outbreak and how that has helped push mortgage rates to 10 year lows. That's good news for homeowners who want to refinance, while student loan borrowers can reap similar benefits.

[Ann Tergeson]

If you have good credit and you're able to get a very low rate on a private loan, you may be able to get a lower rate on that private loan than you're currently paying on your federal loans.

[J.R. Whalen]

That's Wall Street Journal reporter Ann Tergeson coming up. She'll explain the trade offs, a refinancing and how borrowers could be giving up key benefits. Most of the 43 million Americans who own 1.5 trillion DOL in federal student debt could see their interest rate drop dramatically as the Federal Reserve cuts short term rates to near zero. And Wall Street Journal reporter Ann Tergeson is with us with some details. So Ann, how low are student loan rates expected to fall?

[Ann Tergeson]

Student loan interest rates are pegged to the yield of the ten year treasury note. Specifically, they're pegged to the yield of the 10 year treasury note that comes out of the May auction, which is currently scheduled for May 12th. So I spoke to an analyst, a couple analysts who are relatively on top of this market. One in particular is forecasting that interest rates on federal loans for the upcoming school year will hit record lows just on the basis of the fact that interest rates have declined so much since last year. So, you know, specifically he's forecasting in the coming school year that rates on federal loans for undergraduates, these are Stafford loans, could be about a little bit lower than 2%. And rates for graduate students, again, Stafford loans about 3 1/2%. Rates on PLUS loans, which some graduate students take out, but also parents of undergraduate students take out maybe about four and a half percent. So that's what he's forecasting for the moment.

[J.R. Whalen]

Now, these are just estimates, but how do they compare to current rates?

[Ann Tergeson]

Right, so it's significantly lower for the undergraduate Stafford loan. For all three, it's about two and a half percentage points lower than where we are now. So the undergraduate Stafford loan, for example, 4.5% for this past year, 20, 19, 20, and then he's forecasting 1.9%. So that's a significant drop.

[J.R. Whalen]

How would private loans be affected?

[Ann Tergeson]

So there's two markets here. When it comes to student loans. The vast majority of people take out federal loans and that really should be people's first step, regardless, because federal loans tend to be, for most people, they tend to be lower interest rate and they also have lots of flexibility in terms of repayment. So that tends to be the best first place to go for most people. There's also something called the private loan market, which a lot of people, including, especially people who have to buy a lot of money, say for example, medical students or people who attend expensive law schools, they may borrow in the private market. And that's where you borrow from a bank and you get, you know, you get a loan. And you know, in that case, the rate that you're going to get depends in part on your credit score. So if you have a very strong credit score, it's likely that, you know, rates on private loans are going to be declining as well. And if you have a very strong credit score, you may actually get a lower rate on a private loan than you would on a federal loan. Again, that doesn't mean that you should not borrow federal loans first because they do have a lot of benefits that people should consider before going straight to the private loan market.

[J.R. Whalen]

Okay, so how would someone take advantage of these lower rates?

[Ann Tergeson]

So there's two ways. Now, one way is that in the upcoming school year, anybody who has to borrow at that point should look at these federal loans. The rates are going to be lower, so they're going to get a much better deal on whatever they have to borrow for the upcoming school year because of lower rates. People who already have private loans outstanding look at the interest rate on those loans and compare it to what they're going to see in the private loan market. Say within the next four, five, six weeks, those interest rates are probably going to be coming down, perhaps even dramatically, and you may be able to get a lower rate and then you could refinance your private loans into a lower rate loan. The trickier decision is if you have outstanding federal loans, the trickier decision is whether to consider refinancing into a private loan. Now it's going to be very tempting for people to look at like variable rates because variable rates are lower than the fixed rate loan. But given how low interest rates are right now, if you're going to have an outstanding debt for more than the next couple months, you really should be looking at locking in a fixed rate on those loans. So definitely those people should be exploring refinancing.

[J.R. Whalen]

Now. When somebody refinances, they move from the federal loan market to the private loan market. What are the trade offs of doing that?

[Ann Tergeson]

That's really something that people have to think about carefully. So on the one hand, there's the interest rate to consider. So you know, if you are, if you have good credit and you're able to get a very low rate on a private loan, you may be able to get a lower rate on that private loan than you're currently paying on your federal loans. In that case, you know, you have, on the one hand, you have the opportunity to save money. However, you know, you're also going to give up a lot of potential flexibility in terms of repayments that you would get with the federal loan market. So you know, federal loans, for example, there's various situations in which they allow borrowers to put their repayments on hold. For example, in the case of unemployment or economic hardship, you can put those loans on hold. In the private market you may be able to get some of that, but you're not going to get it automatically. And with federal loans, you can do it for up to three years. In the private loan market, you're probably not going to be able to do that. So you're giving up that flexibility, you're giving up other flexibility. Included. In the federal loan market, there are income based repayment plans where your repayment can be reduced depending on your income. There's also loan forgiveness plans. You're going to be giving that up too. So you have to be very aware of what you're giving up if you leave. If you refinance into a private loan

[J.R. Whalen]

from federal loans, what effect could exploring refinancing have on someone's credit score?

[Ann Tergeson]

You should probably, you know, shop around. Don't just go with the first, you know, company that gives you a quote. You maybe want to look at a couple other companies as well. You want to be asking, inquiring about, you know, the interest rate that you would get at a couple different companies. You want to do that within say, a two week period so that you don't actually create any problems in terms of reducing your credit score.

[J.R. Whalen]

Now, a moment ago, you mentioned flexibility. Is it likely that lenders could be lenient if, say, somebody has contracted coronavirus or during this time they've lost their job and they can't make a payment?

[Ann Tergeson]

So here's where the federal loans offer some flexibility. This is nothing that's been introduced recently. This is just the way federal loans go. If you have an economic hardship, if you're unemployed and you have federal loans, you can apply to suspend your repayments. There are two processes. One's called forbearance, and the other one is called deferment. The type of loan you have dictates which process you go through. But, you know, it's fairly easy to get some kind of, you know, suspension of payments for the short term based on things like economic hardship with federal loans. In Washington last week, President Trump actually announced something new, which is a suspension on interest accruals for federal loans going forward. So that's what's new. And according to the Department of Education, loan servicers were supposed to suspend interest as of the date of this announcement, which was March 15. So people who have federal loans are supposed to see interest accruals stop as of March 13th. This is supposed to be in place until further notice.

[J.R. Whalen]

But none of this should be confused with payment relief.

[Ann Tergeson]

Exactly. So what the Trump administration proposed last week, according to what we're hearing, is that people are still going to have to pay the same amount. Their monthly payment will remain the same. It's just that that full amount will go towards paying down principal, which enables you to pay off your debt sooner. So, you know, there's a lot of people out there who maybe, unfortunately have recently lost jobs or their income's been cut and they might be looking for some kind of relief in terms of the payment amount. Now, those are the people who, within the federal loan system, if they have federal loans, they can apply to suspend their payments.

[J.R. Whalen]

All right, that's Wall Street Journal reporter Ann Tergison with us. Anne, thanks for coming on the show.

[Ann Tergeson]

You're welcome.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Advocate for Durbin Marshall Bill]

Inflation is killing me. But who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Advocate for Durbin Marshall Bill]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Representative]

Tell Congress, stop the Durbin Marshall. Money grab for corporate megastores paid for by the Electronic Payments Coalition.