With the Federal Reserve finally cutting the Federal Funds Rate by 0.50% during its September 18th meeting, interest rates on credit cards, mortgages, personal loans, and other types of borrowing should be on their way down. But most types of student loans won’t see any impact based on rate cuts — at least not through the end of the year and into next year.
If you have student loan debt from the last few years, you may be wondering if rate cuts from the Fed will impact your personal interest rate, your monthly payment, and the other details of your loan. You may also be wondering if there are steps you can take now to secure a lower rate for your existing debt, including refinancing your loans with a private lender.
How Fed Rate Cuts Impact Federal Student Loans
Rate cuts from the Fed don’t move the needle on federal student loan rates for existing loans at all. Certified Student Loan Professional (CSLP) Glenn Sanger-Hodgson of Shonan Gold Financial LLC says this is because federal student loan rates change just once each year on July 1st. The rates set for the year remain in place until June 30th of the following year, when they are adjusted again.
Federal student loan rates are also fixed, meaning any loans disbursed during this period have the same interest rate for the life of the loan. This means changes to interest rates that take place during repayment don’t impact loans that have already been disbursed. Since interest rates on federal student loans can’t change until July 1st of next year, any future changes will be for new loans disbursed after that date until June 30th of the following year.
Unfortunately, this all means individuals who took out federal student loans in the last year (or any time in the past) are stuck paying the rates they have, for better or for worse.
This isn’t great news for those who will or have had loans disbursed after July 1st 2024, when the the interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans for undergrads is 6.53% and the rate for Direct Unsubsidized loans for graduate or professional students is 8.08%.
Fed Rate Cuts And Private Student Loans
Sanger-Hodgson says that those with private student loans, especially variable interest rate loans, are more likely to feel the effect of changes in the federal funds rate. Much like federal student loans, interest rates on private student loans are set based on a benchmark — typically the Secured Overnight Financing Rate (SOFR), plus some margin based off of the borrower’s creditworthiness. However, private student loan rates fluctuate over time based on market conditions versus federal student loan rates that change once per year.
This means borrowers with private student loans could see their variable rates drop based on Federal Reserve rate cuts. It also means those shopping for private student loans or looking to a private company to refinance their student loans may find more competitive rates now than last year.
Should You Refinance Student Loans?
With interest rates on private student loans potentially on their way down, it’s easy to wonder if you could benefit from refinancing. And if you’re still in college and comparing your loan options, private student loans may seem more attractive than federal loans as rates continue to drop.
Amanda Elliott, who serves as Associate Director of Financial Aid and Student Finance Advising at Colorado State University Global says that variable-rate private loans for current students may stand out at the moment due to their very low introductory rates after a Fed rate cut.
“This could provide short-term savings on interest,” she said.
If you have private student loans with a high interest rate, refinancing could help you lock in a lower rate, especially if rates continue to fall due to future Fed rate cuts.
“This can reduce your monthly payments and the total interest you’ll pay over the life of the loan.,” said Elliott.
Still, you’ll want to be careful of refinancing federal student loans with a private lender — even if lower rates on private loans make this move seem like a no-brainer. This is because federal student loans come with protections private student loans simply do not, including federal deferment and forbearance options, access to income-driven repayment plans, and access to existing loan forgiveness plans like Public Service Loan Forgiveness (PSLF). And if broad student loan forgiveness is able to pass in the future, it would likely apply only to federal student loans.
These are some of the reasons people tend to treat federal student loan debt differently than other types of debt, and why Sanger-Hodgson says you should think over the pros and cons and what your goals are first.
“If you need access to income-driven repayment options, then sticking with your federal student loans may be the best option, even if it means having loans with a higher interest rate,” he says. “And borrowers who are pursuing forgiveness may be better served staying with federal student loans, especially if the effective interest rate on their forgiven loans is lower than rates available through private refinancing.
The Bottom Line
Will the latest Federal Reserve rate cut impact your student loans? As you can tell from the information I just shared, the answer is “it depends.”
Federal student loan rates will remain unchanged until at least July 1st of next year, whereas the impact on private student loans will be more immediate. Even so, nobody knows how low rates will fall on private student loans, nor do they know when rates will hit their next floor.