What the Fed's interest rate cut means for student loan borrowers
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Collectively, Americans owe more than $1 trillion in student loans — a staggering number looming over already strained wallets.
Why it matters: Wednesday's interest rate cut, and the expected longer-term rate-cutting cycle, will have far-reaching ripple effects for the economy and for consumers. That includes providing a slice of relief to some student loan borrowers.
The big picture: The Fed began cutting interest rates from a two-decade high Wednesday.
- That will make it cheaper for consumers looking to borrow or repay some of their debts.
- "The Fed funds rate is like a domino effect, that as soon as that one falls, all the other ones that are tied to it fall too," Bankrate analyst Sarah Foster explained.
- Borrowers carrying credit card, auto or student loan debt with higher rates may be able to seize the opportunity to save a bit on their monthly payments, as well.
How Fed rate cut will affect student loan borrowers
Driving the news: Borrowers with private student loans carrying variable interest rates could see slightly lower minimum payments on their billing statements within one to two months, Foster said. The exact impact may depend on the lender.
- Other private loans have a fixed rate — and like federal borrowers, those loan payments won't be impacted by the Fed decision unless borrowers choose to refinance.
- Private loan borrowing makes up over 7% of the outstanding student loan debt.
- According to Bankrate, average private student interest rates range from around 4% to around 17%.
Zoom out: The total average student loan debt, with private loans included, could be as high as $40,681, as of last month.
When is it smart to refinance private student loans?
State of play: Those with variable-rate private student loans may choose to refinance to a fixed-rate loan if lower rates come — but as Foster said, borrowers should do the math before making a decision.
- "Keep an eye on rates on the market, if you see something that's better than what you're paying, that's at least half a percentage point lower, it's a good time to start doing the math," she advised.
- "But really make sure you're aware of all the costs associated with transferring your debt or converting your debt from a variable rate loan to a fixed rate loan," she said, highlighting the fees coupled with refinancing and noting best practice is to compare offers from "at least three lenders."
Federal student loan debt: Impact of rate cuts
Zoom out: Interest rates on federal student loans are fixed and are determined by the government each year, calculated by the auction of the 10-year Treasury note (this May saw rates soar).
- Therefore, borrowers with federal student loans will not be directly impacted if the Fed lowers interest rates — the fixed rate is married to the loan throughout the duration of its repayment.
- Borrowers taking out new loans after a cut could see effects on their interest rates compared to loans taken out the year prior.
- "What influences your interest rate for a federal student loan is really the time at which you're borrowing," Foster said. "Because everyone, regardless of your background, your income .... all those people taking out the same type of loan are given the same interest rate."
