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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.

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Millennial reading news about student loans in coffee shop.
2020-07-10
This Week in Student Loans: July 10, 2020

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:
US Capitol

GOP Concerns Over Costs Could Limit Student Loan Relief In Next Stimulus

GOP Senate leaders are showing increasing concern about the costs of additional economic relief, particularly when it comes to student loan relief, as they weigh a second stimulus bill.

Source: Forbes

 

State Senate Chambers

Democrats Fail to Override Trump Veto on Student Loan Policy

This Friday, House Democrats were unable to override the Trump Administration's veto on a proposal to reverse the Education Department's strict policy on loan forgiveness for students misled by for-profit colleges. The House voted 238-173 in support of the override measure, coming up short of the two-thirds majority needed to send it to the Senate.

Source: ABC News

 

question mark

Study Finds Gen Z Borrowers Are Unaware of COVID-19 Student Loan Relief Programs

While the CARES Act allowed those with federal student loans to pause payments until September, a recent survey from Student Debt Crisis shows that Gen Z borrowers, in particular, were the least aware of the relief program.  

Source: CNBC

 

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Author Shares Her Big 'Wake Up Call' That Led Her to Pay Off $81,00 in Student Debt

35-year-old Melanie Lockert, the author of "Dear Debt," shared with CNBS the story of how she was able to pay off $81,000 in student loan debt over 9 years, with her big wake up call coming five years into repayment.  

Source: CNBC

    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.

picture of different loan term lengths
2020-07-08
Dash Through the Debt: How a Shorter Student Loan Term Adds Up

If you’re like most college graduates, you’re sick of your student loans. If you want to get rid of your debt once and for all, refinancing your loans and opting for a shorter student loan term is a smart strategy. You can secure a lower rate and pay off your loans years ahead of schedule while saving thousands.    Here’s what you need to know about shortening your loan term, as well as how much shortening your student loan term could save you.   

How long does the average graduate take to repay their student loans? 

When you graduate from college, you likely expect to pay off your student loans quickly. However, life often gets in the way of your plans, even if you make a good salary.    While the
Standard Repayment Plan for federal student loans is ten years, many students extend their repayment terms with income-driven repayment plans, forbearance or deferment periods, or by missing payments altogether. According to the One Wisconsin Institute, the average length of repayment for graduates with bachelor’s degrees is 19.7 years. If you have graduate student loans, the average repayment period is even longer.    With such a longer repayment term, you’ll pay thousands of dollars in interest charges on top of what you initially borrowed, adding to your loan's total cost. And, carrying such a heavy financial burden for decades can force you to put off other goals, like buying a house, starting a business, or even getting married.   

How to get a shorter student loan term

When you take out a student loan, you sign a loan agreement or promissory note where you promise to pay the loan back according to set repayment terms. The agreement will outline the loan’s interest rate, payments, and loan term.    Many borrowers don’t realize that you’re not stuck with those terms forever. If you’re unhappy with your current loan’s repayment terms or your finances improve, there is a way to change them: student loan refinancing.*    When you refinance your debt, you apply for a loan from a lender like Education Loan Finance for the amount of your total existing student loan debt. If you have both federal and private student loans, you can combine them so you’ll have just one loan to manage and one monthly payment to remember.*    The new loan will have different terms than your old ones, including the interest rate and monthly payment. When you apply for the loan, you can choose your own loan term that works for your goals and budget. For example, if you currently have a ten-year loan term, you can select a five or seven-year loan if you'd prefer a shorter term.   

Benefits of a shorter student loan term

Instead of making payments for 20 years or more, it’s a good idea to select a shorter loan term, if you can afford it. Opting for a shorter student loan term has many advantages:   

1. You can get a lower interest rate

When you have a long loan term, lenders consider you to be a riskier borrower and they charge you a higher interest rate. You’ll have a lower monthly payment, but the longer loan term will cost you more money in interest charges over time.    By contrast, lenders reserve their lowest interest rates for credit-worthy borrowers who choose the shortest loan terms. If you want the best possible rate, opting for a shorter loan term will allow you to save money.    You’re probably wondering, “How much can I save by shortening my loan term?” Let’s look at an example.    Pretend you had $30,000 in student loans with a ten-year loan term at 5% interest. By the end of your repayment term, you would repay a total of $38,184; interest charges would cost you $8,184.    If you refinanced your loans and chose a five-year loan and qualified for a 3.19% interest rate, you’d repay just $32,496 over the life of your loan. By refinancing your debt and selecting a shorter loan term, you’d save $5,688.   

Original Loan

Balance: $30,000 Interest Rate: 5% Loan Term: 10 Years Minimum Payment: $318 Total Interest: $8,184 Total Repaid: $38,184  

Refinanced Loan

Balance: $30,000 Interest Rate: 3.19% Minimum Payment: $542 Total Interest: $2,496 Total Repaid: $32,496

2. You’ll pay off your debt earlier 

When you choose a shorter loan term, you’ll be able to pay off your debt years ahead of schedule. Not only will you save a significant amount of money in interest charges, but you’ll also have the psychological benefit of not having to worry about debt any longer. If your student loan balance was causing you stress, that’s a significant advantage, and a huge weight off your shoulders.   

3. You’ll free up cash flow

Once you’ve paid off your student loans, you’ll free up extra cash flow. You’ll no longer have to make your monthly loan payment, so you can instead direct that money toward other goals, such as saving for retirement, boosting your emergency fund, or buying a home. If you use the above example, you’d have $542 per month you could use to fund your financial goals.    To put that in perspective, let’s say you paid off your loans by the time you turned 27. After that, you invested the $542 you were paying toward your student loans into your retirement nest egg. If you contributed $542 every month into your retirement fund and earned an 8% annual return, on average, your account would be worth over $1.8 million by the time you reached the age of 67.   

The bottom line

While extending your loan term may seem like a good idea to get a lower monthly payment, that can be a costly mistake. You’ll have to pay a higher interest rate and, over time, the longer loan term will cause you to pay back far more in interest charges.    Instead, consider refinancing your loans and selecting a shorter student loan term. You’ll be debt-free sooner, and you may save a substantial amount of money.    To find out how much you can save, use the student loan refinance calculator.*  
  *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.
2020-07-02
Should You Keep Paying Federal Student Loans During CARES Act Suspensions?

You probably already know that the CARES Act has suspended Federal student loan payments for the time being. Until September 30th, you aren’t required to make payments, and the interest rate of your loans is set to 0%. This is primarily to help those with student loans who are struggling during these uncertain times. If your student loans are in forbearance due to the CARES Act suspensions, you have several repayment options based on your financial goals.

 

Option 1: Take Advantage of That 0% Interest

Normally, when making extra payments on student loans, your money is first attributed to any collections charges or late fees, then to accrued interest, then to the principal itself.

 

With the current 0% interest rates, however, if your account doesn’t have any fees or charges, you’ll save some money at that step. The more you can reduce your principal balance, the more money you’ll save over time in interest.

 

For example, let’s say you have $25,000 in student loans at a 4% interest rate and you want to pay it off in the next 10 years. Over that period, you accrue $5,373.54 in interest. However, if you take advantage of the CARES Act 0% interest, you can change the course of your repayment.

 

For instance, if you continue to pay your student loans during this period, the payments will be attributed straight to principal and will save you about $300 in accrued interest over the course of your repayment.

 

Option 2: Wait Until September And Resume Payments

If the coronavirus has affected your finances, don’t worry about paying down your student loans too quickly. Instead, use this time to get your other debts under control. Focus on paying back higher interest rate debt, like credit card debt, which will impact your long-term financial health.

 

Option 3: Refinance and Take Advantage of Low Interest Rates

During this time, many student loan refinancing companies are offering low interest rates. If you’re locked into an unfavorable rate, this would be a great time to consider refinancing student loans to save on interest costs.

 

This is an especially great option for borrowers with private loans, as these types of loans aren’t currently receiving any type of federal forbearance benefit. For a personalized look at how refinancing could improve your financial health, check out the ELFI Student Loan Refinancing Calculator.*

 

So, should you keep paying federal student loans during the CARES Act suspensions? The answer depends on your unique goals. Whether you choose to pay your federal loans, take care of other expenses, or refinance your student loans, this is a great opportunity to eliminate some additional debt before the September 30 deadline. Happy saving!

 
 

*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.