A long-term environment with superlow interest rates can mean different things to different people—sometimes multiple things to the same person.
With the Federal Reserve signaling that benchmark, short-term interest rates would likely be held near zero until 2023, many may be reminded of the period following the last recession, when superlow rates lasted for seven years.
Now America’s savers and borrowers face new, possibly more difficult choices. Over the previous decade, for example, the yield on safe 10-year U.S. government debt averaged about 2.4%, according to FactSet; today it is hovering around 0.7%.
Low rates may encourage some people to buy homes or refinance them, even as others consider delaying retirement or postponing other money milestones. Whether superlow rates present opportunity or peril depends on where you fall on the borrowing-saving spectrum. Here’s how to think about near-zero rates for the next few years.
Loans will stay cheap
Mortgage rates are likely to stay low. The average rate on a 30-year fixed mortgage is 2.87%, near its lowest level in about half a century.
That is likely to spur more home buying, though caution is warranted.
“I would never encourage someone to rush out and buy a home just because rates are low,” said Mike Fratantoni, chief economist and senior vice president of research at the Mortgage Bankers Association. “At the right point in your life, that’s when you want to buy a home.”
Historically low mortgage rates already spurred a refinancing wave earlier this year. Mr. Fratantoni said the desire to refinance will likely decrease, since a considerable share of the market has already done that. In many cases, banks are setting refinance rates higher than rates for home purchases.
Credit-card offers are recovering. Lenders mailed out about 99 million offers in July to potential customers, up from 57 million in June, according to research firm Mintel. Credit-card interest rates, though, might not drop quickly, said Andrew Davidson, chief insights officer for Mintel.
“We might see it edge down a little bit, but it may not be for quite some time,” said Mr. Davidson. Banks are hesitant to bring rates down when they are fearful about losses, he added.
Diminished income streams may lead some people to delay retirement, or college.
Trade-offs should be considered carefully, Prof. Ma said. Ask yourself: Are other funding options available? Is the loss of the value of a 529 account really worth delaying education?
“Delaying education comes with opportunity costs,” Prof. Ma said. “If I had the degree earlier, I may have been able to find a job earlier. With that income, I may be able to invest. It’s important for consumers to see these things in combination. It is really a personal consideration.”
Delaying retirement may be a more-pressing need for many. “I think people are going to save less in 401(k)s and IRAs, and people may be tempted to put their money under their mattresses,” said Olivia S. Mitchell, professor of business economics and public policy at the University of Pennsylvania. “I think people will revisit the idea of retiring young.”
The delay play
A zero-rate environment means different things for federal loans and private student loans. Right now, those with federal loans can defer payments until Dec. 31.
Be careful when refinancing or consolidating federal loans, said Malik Lee, a certified financial planner based in Atlanta. Doing so could pull you out of forbearance, which has been a lifeline for those struggling to adjust their budgets during the pandemic.
The situation is different for private-education loans. Rates for these are tied to an index such as the London interbank offered rate. First, figure out what you can get.
“I have clients who have private loans at 10%, and that is a no-brainer,” Mr. Lee said. “They could get somewhere between 5% or 6%, and they could lower their payments by half—that makes a lot of sense.”
Student loans
Photo Illustration: Emil Lendof/The Wall Street Journal
Laura French, an elder care attorney in Georgia, sees it all the time. A family is in denial about a parent or another older relative’s deteriorating physical or mental health until there’s a crisis, and “all of a sudden everyone realizes ‘we can’t do this alone.’”
That’s often when the panicked call to an elder law attorney is made. Although these attorneys specialize in planning for the thorny legal complications that can arise in old age, few people think to consult one preemptively to avoid making that panicked phone call in the first place. To understand what these lawyers do and why you might need one, we sought answers to these four questions.
In all cases, elder care lawyers say, they are working in the best interest of the older person, though how that is accomplished may differ.
If the older person is competent and calls the lawyer, then there’s no issue. But if an adult child or other family member or friend is an agent—that is, has power of attorney for an elderly person—and asks for help, the lawyer is representing the agent. Nonetheless, anyone who has power of attorney has a fiduciary responsibility to do what is best for the person he or she is responsible for, says French, who founded the French Law Group in Watkinsville, Ga., and is an adjunct professor of law at the University of Georgia. The lawyer also would verify that the elderly person is incapable of decision-making through a doctor’s certification or perhaps by directly meeting with the person.
On the flip side, sometimes children come in with a parent they believe is competent but that French discovers is not. Then she will ask the children to follow up with a doctor.
If a power of attorney is not in place and the elderly parent is incapable of giving it, then the family must go to court to have someone appointed as a guardian—a time-consuming option to be avoided at all costs. In New York, that process can take six months, says Wendy Sheinberg, a partner at the New York and New Jersey law firm Rivkin Radler.
If a parent is cognitively capable and doesn’t want the attorney’s help, there’s nothing a lawyer can do.
“Sometimes I suggest the child speak to a geriatric care manager,” as a way for the family to have a third party available to assist in hashing out the issues that need to be decided, says Sheinberg, who is also chair of the Elder Law Committee for the New York County Lawyers Association.
French says that after enough years in the business elder care lawyers can usually tell if someone is more interested in grabbing an elderly person’s assets than in providing the best care. If so, the elder law attorney has an ethical obligation to refuse that client.
Laura French, an elder care attorney in Georgia, sees it all the time. A family is in denial about a parent or another older relative’s deteriorating physical or mental health until there’s a crisis, and “all of a sudden everyone realizes ‘we can’t do this alone.’”
That’s often when the panicked call to an elder law attorney is made. Although these attorneys specialize in planning for the thorny legal complications that can arise in old age, few people think to consult one preemptively to avoid making that panicked phone call in the first place. To understand what these lawyers do and why you might need one, we sought answers to these four questions.
In all cases, elder care lawyers say, they are working in the best interest of the older person, though how that is accomplished may differ.
If the older person is competent and calls the lawyer, then there’s no issue. But if an adult child or other family member or friend is an agent—that is, has power of attorney for an elderly person—and asks for help, the lawyer is representing the agent. Nonetheless, anyone who has power of attorney has a fiduciary responsibility to do what is best for the person he or she is responsible for, says French, who founded the French Law Group in Watkinsville, Ga., and is an adjunct professor of law at the University of Georgia. The lawyer also would verify that the elderly person is incapable of decision-making through a doctor’s certification or perhaps by directly meeting with the person.
On the flip side, sometimes children come in with a parent they believe is competent but that French discovers is not. Then she will ask the children to follow up with a doctor.
If a power of attorney is not in place and the elderly parent is incapable of giving it, then the family must go to court to have someone appointed as a guardian—a time-consuming option to be avoided at all costs. In New York, that process can take six months, says Wendy Sheinberg, a partner at the New York and New Jersey law firm Rivkin Radler.
If a parent is cognitively capable and doesn’t want the attorney’s help, there’s nothing a lawyer can do.
“Sometimes I suggest the child speak to a geriatric care manager,” as a way for the family to have a third party available to assist in hashing out the issues that need to be decided, says Sheinberg, who is also chair of the Elder Law Committee for the New York County Lawyers Association.
French says that after enough years in the business elder care lawyers can usually tell if someone is more interested in grabbing an elderly person’s assets than in providing the best care. If so, the elder law attorney has an ethical obligation to refuse that client.
Effective federal funds rate
Borrowers with good credit scores will benefit most from superlow rates. But banks are tightening lending criteria. That means riskier borrowers could be left out of the party.
“Consumers should be aware and not just look at the rate advertised,” said Yiming Ma, assistant professor of finance at Columbia Business School.
Diminished income streams may lead some people to delay retirement, or college.
Trade-offs should be considered carefully, Prof. Ma said. Ask yourself: Are other funding options available? Is the loss of the value of a 529 account really worth delaying education?
“Delaying education comes with opportunity costs,” Prof. Ma said. “If I had the degree earlier, I may have been able to find a job earlier. With that income, I may be able to invest. It’s important for consumers to see these things in combination. It is really a personal consideration.”
Delaying retirement may be a more-pressing need for many. “I think people are going to save less in 401(k)s and IRAs, and people may be tempted to put their money under their mattresses,” said Olivia S. Mitchell, professor of business economics and public policy at the University of Pennsylvania. “I think people will revisit the idea of retiring young.”
The delay play
A zero-rate environment means different things for federal loans and private student loans. Right now, those with federal loans can defer payments until Dec. 31.
Be careful when refinancing or consolidating federal loans, said Malik Lee, a certified financial planner based in Atlanta. Doing so could pull you out of forbearance, which has been a lifeline for those struggling to adjust their budgets during the pandemic.
The situation is different for private-education loans. Rates for these are tied to an index such as the London interbank offered rate. First, figure out what you can get.
“I have clients who have private loans at 10%, and that is a no-brainer,” Mr. Lee said. “They could get somewhere between 5% or 6%, and they could lower their payments by half—that makes a lot of sense.”
Student loans
Borrowers with good credit scores will benefit most from superlow rates. But banks are tightening lending criteria. That means riskier borrowers could be left out of the party.
“Consumers should be aware and not just look at the rate advertised,” said Yiming Ma, assistant professor of finance at Columbia Business School.
Diminished income streams may lead some people to delay retirement, or college.
Trade-offs should be considered carefully, Prof. Ma said. Ask yourself: Are other funding options available? Is the loss of the value of a 529 account really worth delaying education?
“Delaying education comes with opportunity costs,” Prof. Ma said. “If I had the degree earlier, I may have been able to find a job earlier. With that income, I may be able to invest. It’s important for consumers to see these things in combination. It is really a personal consideration.”
Delaying retirement may be a more-pressing need for many. “I think people are going to save less in 401(k)s and IRAs, and people may be tempted to put their money under their mattresses,” said Olivia S. Mitchell, professor of business economics and public policy at the University of Pennsylvania. “I think people will revisit the idea of retiring young.”
The delay play
A zero-rate environment means different things for federal loans and private student loans. Right now, those with federal loans can defer payments until Dec. 31.
Be careful when refinancing or consolidating federal loans, said Malik Lee, a certified financial planner based in Atlanta. Doing so could pull you out of forbearance, which has been a lifeline for those struggling to adjust their budgets during the pandemic.
The situation is different for private-education loans. Rates for these are tied to an index such as the London interbank offered rate. First, figure out what you can get.
“I have clients who have private loans at 10%, and that is a no-brainer,” Mr. Lee said. “They could get somewhere between 5% or 6%, and they could lower their payments by half—that makes a lot of sense.”
Student loans
Borrowers with good credit scores will benefit most from superlow rates. But banks are tightening lending criteria. That means riskier borrowers could be left out of the party.
“Consumers should be aware and not just look at the rate advertised,” said Yiming Ma, assistant professor of finance at Columbia Business School.
Not everyone will benefit
Meanwhile, those who save, invest or lend may suffer in this rate environment.
This is especially true when it comes to cash. Those with so-called high-yield savings accounts already saw rates drop when the Fed started cutting. The interest rate on Goldman Sachs Group Inc.’s Marcus online savings account has dropped to 0.6% in September from a high of 2.25% in June 2019.
Another group that gets hit: those who are approaching a life event that requires holdings that produce a steady income stream.
Examples are people with target-date savings vehicles, such as retirement or 529 education savings accounts. These typically shift more money into bonds and cash as retirement or college approaches. But those assets are now likely to yield far less and so will produce less income.
Would-be retirees could see it as “getting both feet stomped on and then kicked in the knee,” said Greg McBride, chief financial analyst at Bankrate. “If you’re dependent on interest income, relying on conservative investments, the returns will fall.”
While low rates may tempt some people to take on more risk, don’t forget: We’re still in a pandemic.
“The Fed is sending the message we want you to spend more and invest in riskier assets,” said Austan Goolsbee, a professor at the University of Chicago Booth School of Business who served as chairman of the Council of Economic Advisers under President Obama. “That’s what the policy is designed to do. If you’re 70 years old, you may not.”
So people may benefit from keeping money stored up in emergency funds rather than taking on more risk at this time.
“Don’t chase yield without being mindful of the risk,” Mr. Lee said. “We’re still not out of the water with Covid. I’d caution people: Don’t get greedy.”
More risk, more reward?