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3-month LIBOR forecast historic accuracy?

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  • 3-month LIBOR forecast historic accuracy?

    For those of you who have variable rate student loans... How many looked at forecasted 3-month LIBOR rates prior to choosing a variable rate? Did anyone fine any of these forecasts accurate? Looking at a few forecasting sites from a Google search it seems anticipated that LIBOR will stay as low as it is or potentially even drop more through 2022 at least. I'm considering looking into a new re-fi of my student loans and have always used a fixed rate, but seeing some people paying sub-1% interest recently has me considering a variable rate loan...

  • #2
    I went with a variable rate through SoFi last year and now it is sitting at 0.16%. SoFi pegs the rate on the 1 month LIBOR but at the end of 2021 LIBOR will be ending and SOFR will take over.

    My game plan is to ride this out for another 30 months and I’ll be done with my student loans.

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    • #3
      Libor is dead after 2021.
      In response to this potentiality, the Federal Reserve Board and the Federal Reserve Bank of New York (New York Fed) created the Alternative Reference Rate Committee (ARRC) “to identify a set of alternative reference interest rates that are more firmly based on transactions from a robust underlying market and that comply with emerging standards,” as well as to establish best practices for contract quality, and to develop and create an implementation plan. In 2017, the ARRC announced that the Secured Overnight Financing Rate has been chosen as the recommended primary replacement rate for LIBOR.

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      • #4
        Originally posted by traxus View Post
        I went with a variable rate through SoFi last year and now it is sitting at 0.16%. SoFi pegs the rate on the 1 month LIBOR but at the end of 2021 LIBOR will be ending and SOFR will take over.

        My game plan is to ride this out for another 30 months and I’ll be done with my student loans.
        Interesting. I didn't know that. How long have you had that loan? Does the verbiage in your contract state that this SOFR index will take over when LIBOR goes away? After I saw these replies I did some reading and it looks like some private student lenders are concerned that following this new index may cut into their profit margins and have more vague plans outlined in their contracts.

        i.e. Discover's contract (although I don't know anyone that had a student loan from them) apparently states "If the 3-month LIBOR Index is no longer available, we will substitute an index that is comparable, in our sole opinion, and we may adjust the Margin so that the resulting variable interest rate is consistent with the variable interest rate described in this paragraph. If at any time the fixed or variable interest rate as provided in this paragraph is not permitted by applicable law, interest will accrue at the highest rate allowed by applicable law."

        I'm going to do some more research on this.

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        • #5
          All loans pegged to libor will have the same type of wording. The reason is that base rate and spread are calculated as the lenders margin on that loan.
          If the base increases, the margin decrease to keep you and them at the same effective rate.
          The lender and borrower need to not gain or lose simply by changing the base rate.
          The point is that researching it won’t impact your results, SOFR should be the answer.
          The variable/fixed is your primary choice.

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          • #6
            Originally posted by Tim View Post
            All loans pegged to libor will have the same type of wording. The reason is that base rate and spread are calculated as the lenders margin on that loan.
            If the base increases, the margin decrease to keep you and them at the same effective rate.
            The lender and borrower need to not gain or lose simply by changing the base rate.
            The point is that researching it won’t impact your results, SOFR should be the answer.
            The variable/fixed is your primary choice.
            I get what you're saying, but I don't think there is any obligation for lenders to chose the SOFR as the index they peg the variable rate to. Maybe they go with something else (fed funds rate) or something else that has a historical trend one could look at. What if SOFR is more volatile than what the LIBOR would have been? Hard to say. But I agree that fixed vs variable is the primary choice. If I knew what index they were pegging their variable rates to I may be able to get a better idea if the variable rate will stay stable or increase/decrease over the next couple years

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            • #7
              Most certainly the volatility will be different.
              The libor rate was “cooking the books”. The point is Libor was whatever they said it was. The question is, was that more or less or the same as whatever your “historic” trend of the interest rate you are trying to forecast. Useless exercise.

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