Between 2006 and 2012, the interest on student loans went down by more than one half. When the 2006/07 school year started, rates were nearly at 7%. By the beginning of 2011/12, the interest on tuition loans was below 3.5%. During the same six-year period, the Federal Reserve dramatically decreased overall rates from 5.25% to 0.25%. Just as importantly, several other resources, such as MyFedLoan, started helping students with their financial and loan repayment strategies.
The correlation between all of these changes is not a coincidence. However, unfortunately, many students and graduates are unaware of how they can take advantage of this. After all, they are already occupied with their classes, preparation for grad school, or going to work.
On October 30, the Federal Open Market Committee (FOMC) cut interest rates for the third time this year. This provides students with a great opportunity to lower their debt payments and qualify for other types of loans (such as a mortgage) in the near future. In fact, lower rates mean that they can start saving now, including those who are in their freshman year. Moreover, by taking advantage of resources like MyFedLoan, the right strategy can go a long way for current and former students alike.
Rates Will Go Down
The federal government issues about 90% of tuition loans across the country. Interest payments are directly tied to the rate of the U.S Treasury Department’s ten-year notes. Because of this, the FOMC’s decisions and policies have an immediate impact on what students have to pay.
Just as importantly, the interest on all other types of loans and lines of credit will also go down. Those who just started their collegiate journey can immediately start saving by getting a low interest credit card. In turn, by the time that they graduate, their credit score will help them start their professional careers strongly.
Students who are finishing their studies in the coming one to two years shouldn’t let this opportunity pass by them. They must carefully plan for their post-graduation goals and ambitions. This especially important for entrepreneurs and aspiring homeowners.
When applying for a business loan or mortgage, lenders will carefully scrutinize an applicant’s debt-to-income ratio (how much they make in comparison to their monthly payments). Needless to say, the lower interest charges on student loans mean that lenders will look at your application more favorably.
Even if graduates don’t qualify for a business loan or mortgage right after college, the new rates will certainly make it easier and faster to establish a company or buy a home. Moreover, the savings are, in themselves, very worthwhile.
Your Options: Grad School, MyFedLoan, and Other Resources
In 2017, the average educational debt was almost $37,200 per student. After their latest cut, the FOMC lowered its benchmark interest rate by 0.75% between the beginning of 2019 and October.
If the interest on student loan debts goes down by the same amount, each person would save about $300 per year. This is more than enough to pay off an entire credit card in many cases.
There are several ways for borrowers to take advantage of these changes. For some students, the option of going to graduate school might look more desirable. That may mean incurring more debt, but getting a master’s or higher degree can increase your annual pay by $17,000.
When coupled with low interest payments (on both tuition and general debts), this endeavor can be more than worth it. Even more so with the right long-term strategy and careful financial planning.
Students can also take advantage of certain resources, such as MyFedLoan. The program, which is managed by the federal government, provides borrowers with free consultations and advice on paying back their loans.
In fact, they can also help students refinance their debt, lower monthly payments, and access the offerings of several lenders. Additionally, MyFedLoan provides support for those who don’t want tuition loans to impact their ability to qualify for a mortgage or line of credit.
FOMC Cuts: When Will You See the Change?
Generally speaking, it can take some time before lower interest rates are passed on to consumers. For example, between 2007 and 2009, the Fed’s rate went from over 5% to only 0.25%. During this same period, however, student loan interest payments declined by less than 2%. They only went below 3.5% by the start of the 2011/12 academic calendar year.
Because of this, some students might be reluctant to start rejoicing over this or making future plans. Yet, it is also important to keep in mind that it takes the same amount of time to graduate.
For example, someone who was a freshmen in 2007/08 (when the interest on tuition loans was almost 7%) would’ve graduated in 2011/12. By the time that their grace period ended and the first payment became due, the rate was already below 3.5%.
Similarly, a student who started grad school this year would benefit from the lower interest by the time that they graduate. Just as importantly, we must take into account less expensive mortgages and credit card payments, which will immediately change in light of the FOMC’s recent cuts.
Another concern is that students who already graduated will still have the same payment amounts, even after the Fed’s October decision. After all, tuition loans have a fixed interest rate that doesn’t change after it’s granted, regardless of the FOMC’s policies
Yet, this perspective is only valid up to a certain extent. Through taking advantage of certain resources, such as MyFedLoan, graduates can refinance their debt and lock in the currently discounted rate. In this case, the fixed interest gives borrowers an advantage.
The Important Points
The future is also brighter for degree holders. If they want to go to grad school, it is now possible to do so at a cheaper price. The pay increase associated with getting a masters or doctorate degree makes the loan payments even more insignificant.
Those who don’t want to go to grad school will see their credit card interest rate diminish. They can also qualify for a mortgage or auto lease more easily and at a lower cost.
Last month, the Federal Reserve concluded a series of interest rate cuts. The impact of their decisions will be felt by students, both current and former ones. Perhaps most noteworthy, the new rates have opened what would be otherwise closed doors.
Going to graduate school is going to be cheaper, as will any interest payments on a mortgage or small business loan. With the help and guidance of certain agencies, such as MyFedLoan, students can start planning for a more prosperous and successful future.
The two most important things in all of this are: First, now is the right time to rethink your strategy. Second, millennials are moving closer to having the same financial security and accessible opportunities that previous generations enjoyed.