President Joe Biden (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
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Here’s what higher interest rates mean for your student loans.
Here’s what you need to know — and what it means for your student loans.
Student Loans
As if the Covid-19 pandemic wasn’t enough, the Federal Reserve may raise interest rate up to three times in 2022. With federal student loan payments restarting on February 1, 2022, student loan borrowers may be worried not only about paying student loans, but also about what this means for the cost of student loans. (No, Biden won’t extend student loan relief again). Let’s keep it simple for you.
Student loans: what interest rate hikes mean
For the last several years, the Federal Reserve has kept interest rates low. In 2022, the Federal Reserve indicated that it may raise interest rates up to three times to combat inflation. Generally, when the Federal Reserve hikes interest rates, the cost of borrowing increases. This means that your mortgage, for example, could become more expensive. While debt become more expensive to borrow, savers can earn a higher return on the money in their bank account. Specifically, the Federal Reserve changes the federal funds rate, which is the rate that financial institutions charge each other to borrow money overnight. The change in the federal funds rate impacts the interest rate you pay on your credit card debt or the funds you earn in your savings account. What about student loans? (Why Biden ended student loan relief).
Student loans: the cost may increase
If you have student loans, then they may become more expensive if the Federal Reserve raises interest rates. However, before you start to panic, it’s important to understand the details. The good news is that if you currently have federal student loans, an increase in interest rates won’t affect your student loans. Why? Federal student loans have fixed interest rates, which means no matter how much interest rates change, you will always have the same interest rate for the life of your student loans. That said, if you have federal student loans issued before July 1, 2006, then you may have a variable interest rate student loan. In this case, if interest rates increase, your variable interest rate will increase, and your student loans would become more expensive. (That said, even as variable interest rate student loans could become more expensive, don’t expect Biden to enact wide-scale student loan cancellation before the end of student loan relief).
Private student debt: it depends
While federal student loans today have a fixed-interest rate, private student debt is different. How? For private loans, it’s possible to have a fixed interest rate or a variable interest rate. A fixed interest rate means that your interest rate will never change, even if interest rates increase or decrease. In contrast, a variable interest rate can change and interest rates rise and fall. So, if you have private student debt with a fixed interest rate, then your student loan interest rate will not be impacted. However, if you have private debt, then your student loans will become more expensive as interest rates rise.
What are the rates on new student loans?
The interest rate for federal student loans are reset on July 1 of each year. If the Federal Reserve hikes interest rates in 2022, then it’s possible that the interest rate on new federal student loans will be higher for new student loan borrowers.
Student loan refinancing: what interest rates mean for your student loans
Many student loan borrowers are planning to refinance student loans as temporary student loan relief expires. Student loan refinancing helps you get a lower interest rate, lower monthly payment, or both.
This student loan refinancing calculator shows you how much money you can save when you refinance student loans.
The good news is that student loan refinancing rates are incredibly cheap right now and start as low as 1.74%. If you plan to refinance student loans, it’s a good move to do so now before the Federal Reserve raises interest rates. Why? When the Fed increases rates, student loan refinancing could become more expensive, which means you could save less money on your student loans.
Make sure you’re prepared for student loan payments to restart. Here are some popular ways to save money and pay off student loans faster: