How Do Federal Interest Rate Cuts Affect My Student Loans?

The Federal Reserve readied itself to lower interest rates yet again in the wake of the housing and credit crises. By lowering the interest rates, the government hopes to brace the economy by cutting a key interest rate. That’s great, but what does this mean for me and my student loans?

If your loans are already consolidated, you really don’t have any worries since your rate is most likely locked in. But for those looking to consolidate or refinance, paying attention to the key benchmarks at which banks base their rates from is a wise decision. Unlike home loans, student loans use different benchmarks to base their lending and rates from. Three of the main benchmarks used are Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR) and prime rate. By looking at these different benchmarks, you can better understand if refinancing your student loans is the right thing for you to do or not.

If you have a variable rate loan, the COFI is probably responsible for your rate of interest. The COFI is a regional average of interest expenses incurred by financial institutions. It is used to calculate variable rate loans. Many lenders will use this rate if you decide to consolidate your private student loans with a variable rate product. The LIBOR rate is the interest rate the most credit-worthy banks around the world charge each other for loans. This rate fluctuates throughout the day and is based on the market, similar to stocks. Read more…