×
TAGS
LIBOR Rates
Student Loan Refinancing
Student Loans

LIBOR: What It Means for Student Loans

December 3, 2019

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

 

If you decide to refinance your student loans, you’re likely looking for the lowest interest rate possible. If you want to pay off your debt aggressively, you may get a lower rate by opting for a variable rate loan rather than a fixed-rate loan.

 

While a variable rate loan may be a smart choice, it’s important to understand how lenders determine your interest rate and what factors may influence it, such as the LIBOR rate.

 

Continue reading to learn more about the LIBOR rate and how it affects your student loan repayment.

 

What is LIBOR?

To understand LIBOR, you must first understand Eurodollars. Eurodollars are bank deposit liabilities — written as U.S. dollars — that don’t fall under U.S. banking regulations. Banks that offer Eurodollars are usually located outside of the United States, and play a big role in the financial industry.

 

The London Interbank Offered Rate (LIBOR) is a money market interest rate that is considered to be the standard in the interbank Eurodollar market. It’s a market for banks and financial institutions, rather than individuals. The LIBOR rate is the rate at which international banks are willing to offer Eurodollar deposits to one another.

 

That all may sound very complex and confusing, and you may be wondering why it matters to you. But the LIBOR rate can affect you directly. Many adjustable-rate loans and lines of credit, such as mortgages, credit cards, and student loans, base their interest rates on the LIBOR rate.

 

How LIBOR affects your variable rate loans

When you apply for a loan, you can often choose between a fixed-rate loan and a variable rate loan. A fixed-rate loan has the same interest rate for the length of your repayment. It never changes, no matter what the market does. By contrast, variable rate loans usually have lower rates than fixed-rate loans for the same term at first. However, they can fluctuate over time to coincide with market changes.

 

If you have variable rate student loans, changes to the LIBOR impact the interest rate you’ll pay on the loan throughout your repayment.

 

Private student loans, including refinancing loans, have interest rates that are tied to an index, such as LIBOR. But that’s not the rate you’ll pay. The lender also adds a margin that is based on your credit; the better your credit, the lower the margin.

 

Your annual percentage rate, or APR, is a way of measuring the full cost a lender charges you per year for funds, and is expressed as a percentage. Your APR can be determined by adding the LIBOR rate to the margin, and including the cost of other fees and charges (if any exist) averaged over the term of the loan. If the LIBOR rate increases, the interest rate on your student loan will increase as well.

 

LIBOR Rate + Margin = Your Interest Rate

There are different maturities for LIBOR, including overnight, one week, one month, two months, three months, six months, and twelve months. Some student loan companies, including ELFI, adjust their interest rates every quarter based on the three-month LIBOR rate, while others adjust rates monthly as their loans are tied to the one-month LIBOR.

 

The LIBOR rate can fluctuate a great deal. However, most private student loan companies have caps on the interest rate, meaning your interest rate will never exceed that amount, no matter how high the LIBOR rate becomes.

 

Current LIBOR rates

As of Friday, November 22, 2019 — the last available data — the LIBOR rate is 1.917%. If the lender sets their margin at 3%, your new rate would be 4.917% (1.917% + 3.00%=4.917%).

 

The current LIBOR rate is significantly lower than it was at the beginning of 2019. On January 2, 2019, the LIBOR rate was 2.79%.

 

LIBOR rate trends

The LIBOR rate rises and falls along with market changes. Over the past 10 years, the three-month LIBOR rate has generally increased.

 

On December 2, 2009, the LIBOR rate was just 0.255%. As of November 22, 2019, the rate was 1.917%. If you had a variable rate loan during that time, that change means your rate would have risen by 1.662%.

 

The chart above displays fluctuations to the 3-month LIBOR based on the U.S. dollar from 2010-2019.

 

Future of LIBOR

LIBOR has been the gold standard that lenders have used for years to determine their rates. However, LIBOR is slowly being phased out and will be replaced with a new index.

 

LIBOR is based on transactions that aren’t as common as they used to be, so the index is considered to be less reliable than it once was. LIBOR is expected to be discontinued sometime after 2021.

 

How will that affect interest rates? The Federal Reserve has convened a committee to facilitate the transition and has recommended a new index to replace LIBOR. Lenders will likely replace LIBOR with the recommended index, or with the U.S. Prime Rate. Be sure to check your student loan documents (typically your Application & Credit Agreement) to better understand the terms of replacing the LIBOR index with a replacement index if you have a variable rate loan.

 

Managing your debt

If you’re planning on refinancing your student loans and are trying to decide between a fixed-rate loan and a variable rate loan, learning about the LIBOR rate can help you make an informed choice. If you want to see how much money you can save with refinancing and what interest rate you can qualify for, use ELFI’s Find My Rate tool to get a quote.*

 


 

*Subject to credit approval. Terms and conditions apply. Variable rates may increase after closing.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

Leave a Reply

Your email address will not be published. Required fields are marked *

2020-01-24
This Week in Student Loans: January 24

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:

A Zero Based Budget Helped This Woman Pay Off $215k Worth of Student Loan Debt in 4 Years

When Cindy Zuniga accomplished a major milestone when she graduated from law school in 2015, however, she also came out with $215,000 in student loan debt. See how she managed to eliminate her debt in just four years by both refinancing her student loans and using a zero based budget.  

Source: ABC News

 

signing legislation

Court Cites Student Loans As Reason To Deny Bar Admission To New Lawyer

Student loan debt can sometimes be a barrier to obtaining professional licensure, specifically for teachers, doctors, and nurses. For one recent graduate of law school, her student loan debt played a significant role in her being denied a license to practice law.  

Source: Forbes

 

Student Loan Debt Is a Key Factor for Gen Z When Making Career Decisions

A recent survey found that Gen Z's concern over student loan debt is a key factor in their career decisions, causing many to prioritize finances over passion when it comes to their fields of study. The study found that an overwhelming 61% of college students would take a job they're not passionate about due to the pressure to pay off their student loans.  

Source: Yahoo News

    That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-01-23
Current LIBOR Rate Update: January 2020

This blog provides the most current LIBOR rate data as of January 15, 2020, along with a brief overview of the meaning of LIBOR and how it applies to variable-rate student loans. For more information on how LIBOR affects variable rate loans, read our blog LIBOR: What It Means for Student Loans.

 

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a money market interest rate that is considered to be the standard in the interbank Eurodollar market. In short, it is the rate at which international banks are willing to offer Eurodollar deposits to one another. Many variable rate loans and lines of credit, such as mortgages, credit cards, and student loans, base their interest rates on the LIBOR rate.

 

How LIBOR Affects Variable Rate Student Loans

If you have variable-rate student loans, changes to the LIBOR impact the interest rate you’ll pay on the loan throughout your repayment. Private student loans, including refinanced student loans, have interest rates that are tied to an index, such as LIBOR. But that’s not the rate you’ll pay. The lender also adds a margin that is based on your credit – the better your credit, the lower the margin. By adding the LIBOR rate to the margin along with any other fees or charges that may be included, you can determine your annual percentage rate (APR), which is the full cost a lender charges you per year for funds expressed as a percentage. Your APR is the actual amount you pay.

 

LIBOR Maturities

There are seven different maturities for LIBOR, including overnight, one week, one month, two months, three months, six months, and twelve months. The most commonly quoted rate is the three-month U.S. dollar rate. Some student loan companies, including ELFI, adjust their interest rates every quarter based on the three-month LIBOR rate.

 

Current 1 Month LIBOR Rate - January 2020

As of Wednesday, January 15, 2020, the 1 month LIBOR rate is 1.67%. If the lender sets their margin at 3%, your new rate would be 4.67% (1.67% + 3.00%=4.67%). The chart below displays fluctuations in the 1 month LIBOR rate over the past year.

  Chart displaying current 1 month LIBOR rate as of January 15, 2020.

(Source: macrotrends.net)

   

Current 3 Month LIBOR Rate - January 2020

As of Wednesday, January 15, 2020, the 3 month LIBOR rate is 1.84%. If the lender sets their margin at 3%, your new rate would be 4.84% (1.84% + 3.00%=4.84%). The chart below displays fluctuations in the 3 month LIBOR rate over the past year.

  Chart displaying current 3 month LIBOR rate as of January 15, 2020. (Source: macrotrends.net)  

Current 6 Month LIBOR Rate - January 2020

As of Wednesday, January 15, 2020, the 3 month LIBOR rate is 1.87%. If the lender sets their margin at 3%, your new rate would be 4.87% (1.87% + 3.00%=4.87%). The chart below displays fluctuations in the 6 month LIBOR rate over the past year.

  Chart displaying current 6 month LIBOR rate as of January 15, 2020. (Source: macrotrends.net)  

Current 1 Year LIBOR Rate - January 2020

As of Wednesday, January 15, 2020, the 1 year LIBOR rate is 1.95%. If the lender sets their margin at 3%, your new rate would be 4.95% (1.95% + 3.00%=4.95%). The chart below displays fluctuations in the 1 year LIBOR rate over the past year.

  Chart displaying current 1 year LIBOR rate as of January 15, 2020. (Source: macrotrends.net)  

Understanding LIBOR

If you are planning to refinance your student loans or take out a personal loan or line of credit, understanding how the LIBOR rate works can help you choose between a fixed or variable-rate loan. Keep in mind that ELFI has some of the lowest student loan refinancing rates available, and you can prequalify in minutes without affecting your credit score.* Keep up with the ELFI blog for monthly updates on the current 1 month, 3 month, 6 month, and 1 year LIBOR rate data.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

young professional smiling after receiving a raise
2020-01-22
How to Use a Pay Raise Responsibly

Getting called into the boss’ office for the first time can feel a little reminiscent of getting called into the principal’s office. You immediately start sweating and wondering what you did wrong. But just like the principal's office, it's not always bad news. In fact, sometimes it's the best news of all: you just got a raise. Congrats! Take yourself out for a celebratory dinner and maybe even splurge on brunch this weekend. But come Monday morning, it's time to get down to business and determine how to use your raise.    You could just enjoy the extra cash coming into your checking account, yes. But, that little financial angel on your shoulder might also nag you about being smarter with that money. Unfortunately, most high school and college classes don’t teach us how to be responsible with our money. We learn all sorts of questionably-practical information like the Pythagorean Theorem but not how to file taxes or how to use a raise responsibly.    To cover that gap in information, we’re here with three actually practical suggestions to use that raise in a way both your principal and your boss would be proud of.   

3 Practical Tips to Use a Raise Responsibly

 

1. Boost Your Retirement Savings

If your employer has a 401(k) plan, you should already be allocating 3–5% of each paycheck toward a retirement account, especially if your employer offers a 401(k) match. This means they’ll contribute as much to your savings as you do, up to a certain amount. Many employers match contributions up to 6% of your salary, and this is, literally, free money. If you contribute 3% of your $50,000 salary, that's $1,500 a year from you and $1,500 a year from your employer for retirement savings.    When you get a raise, you should adjust your paycheck to dedicate a portion or the full amount of that raise to your 401(k) contributions. This is an easy way to save more without much thought or effort needed. If you do this right away, you don’t get used to the extra money, and you just continue living and paying bills as you did before the raise.    If you’re young, this type of contribution can be especially rewarding because of a concept called
compounding interest. This means the interest on your investment earns interest, not just the principal (or original) balance. If you invest $1,500 with a 10% interest rate, your balance would be $3,890 in 10 years. With a simple interest rate that only builds on the initial investment amount, your 10-year balance would be only $3,000.   

2. Pay Off Debts

Another savvy way to use your raise is to allocate a portion or the full amount to your debts. This can be credit card debt, student loan debt, or even repaying a personal loan from mom and dad. But debt isn’t necessarily a bad thing. Certain debts like student loans carry low interest rates so when you consider how to use your raise, consider that other accounts or investments with higher interest rates might make or save you more in the long run. For example, if your student loan has an interest rate of just 8%, it makes more sense to pay off a credit card with a 24.5% interest rate or invest in a stock with a 10% return rate.    >> Related: Should I Save or Pay Down Student Loan Debt?  

3. Allocate the Rest to An Emergency Fund

We alluded to this before, but you don’t have to put all your extra cash in one place. If you get a 5% raise, you can direct 4% toward your student loans and put even 1% in an emergency fund. You should build the emergency fund until you have at least six months of your salary in the account to help you cover bills and general living expenses in case you find yourself suddenly out of work. If six months seems unattainable, aim for at least one or two months to give you four to eight weeks to find work. This emergency fund can also come in handy if unexpected medical bills or car repairs pop up.    If you haven't been lucky enough to get a raise from your employer, or if you’re looking to boost your savings even more, you can give yourself a raise by refinancing student loans.    If you meet the eligibility requirements, student loan refinancing through companies like ELFI can get you a lower interest rate*, which means you could pay less each month and, subsequently, less over the life of the loan. Use the difference between your previous and current monthly payments as a raise. Then allocate that money to your retirement funds and toward paying off debts. ELFI customers reported saving an average of $309 every month and an average of $20,936 in total savings after refinancing student loans with Education Loan Finance.1 That’s a 7.4% raise, which is far above the predicted average 2020 cost-of-living raise of 1.6%. You can refinance both private and federal student loans.    Deciding how to use a raise responsibility is a big decision. Hopefully, with these tips, you can find ways to use those funds in a way that will give you even more play money in the future. The average raise is 4.6%, and with a little knowledge and discipline, you can turn 4.6% into thousands of dollars if you make the right choices on how to use a raise responsibly.  
  *Subject to credit approval. Terms and conditions apply.  

1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.