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How the End of LIBOR Impacts Student Loans

The end of LIBOR means changes are coming for many student loan borrowers with variable-rate student loans.

Written By: Michael P. Lux, Esq.

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For many years, LIBOR has served as the index interest rate for most adjustable-rate student loans. As the LIBOR rate increased or decreased, student loan interest rates moved up or down.

If you have variable-rate student loans, the odds are pretty good that your contract mentions the LIBOR index.

However, LIBOR is being phased out, in part because of a scandal on how rates were determined. The transition away from LIBOR should have minimal impact on student loan borrowers.

Will My Student Loan Interest Rates Go Up Because LIBOR Ended?

Given the reputation that many banks and lenders have for squeezing every penny out of their customers, borrowers are justifiably worried about the transition away from LIBOR causing interest rates to go up.

That said, agencies like the Consumer Financial Protection Bureau are closely watching the situation. The CFPB has also issued detailed guidance on the process.

In theory, the transition away from LIBOR shouldn’t affect interest rates and should go mostly unnoticed by student loan borrowers. However, borrowers with variable-rate student loans are still vulnerable to potential rate increases in the future as economic conditions change.

The Frequently Asked Questions section at the bottom of this article breaks down LIBOR’s replacement and how the transition will work.

Why Did My Interest Rate Go Up?

I suspect that many borrowers will see their interest rates increase and blame the LIBOR transition.

However, the current economic conditions are the most likely explanation.

The subject of inflation has become politically charged, so I’ll just stick with the basics. Inflation is the reason that the prices of goods and services go up as time passes. When inflation is high, interest rates usually increase.

If your student loan interest rate steadily increases, the most likely culprit is inflation. However, there are a couple of other possible explanations for interest rate increases.

Preventing Future Interest Rate Increases

If you are concerned about changes to your student loan interest rate, the best approach is probably to select a fixed-rate student loan.

For federal student loan borrowers, all loans issued since 2006 have been fixed-rate loans. Those with an older variable-rate federal loan can use federal direct consolidation to convert it into a fixed-rate loan.

Borrowers with variable-rate private loans will have to refinance to lock in a fixed rate. To refinance your loans, you will need a solid credit score and income relative to your debt.

As of June, 2024, the following lenders offer the best rates on fixed-rate student loans:

RankLenderLowest RateSherpa Review
1Earnest4.99%Earnest Review
2Splash Financial5.09%*Splash Financial Review
3ELFI5.48%ELFI Review

If you are looking for a fixed interest rate and the lowest possible monthly payment, a 20-year fixed-rate refinance loan is probably the best option. The following lenders currently advertise the lowest rates in this category:

RankLenderLowest RateSherpa Review
1Splash Financial6.08%*Splash Financial Review
2Laurel Road6.55%Laurel Road Review
3ELFI6.64%ELFI Review

Student Loans and the LIBOR Transition: Frequently Asked Questions

Does the end of LIBOR impact my federal student loans?

No. According to the CFPB, private loans are the only student loans potentially impacted by the end of LIBOR.

What index will replace LIBOR?

There isn’t one specific index that replaces LIBOR. However, the law requires lenders to pick a replacement rate that is a “comparable index.”

Most student loan lenders are switching to the SOFR (Secured Overnight Financing Rate). The CFPB has already approved the SOFR as a comparable index. It was initially created as an alternative to the LIBOR.

What information will I receive from my lender?

Federal law doesn’t require a lender to notify the borrower of index rate changes unless the lender picks an index that is not comparable.

Some lenders may still notify borrowers of the change. Call your lender right away if you see any changes that confuse or concern you. If the lender cannot address the issues, consider filing a complaint with the CFPB.

How is the SOFR different than the LIBOR?

For those of us with student loans, we shouldn’t see a difference.

That said, LIBOR was criticized for its lack of transparency and potential for manipulation. SOFR is designed to be less prone to manipulation and more transparent.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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