Here’s what higher interest rates mean on your student loans.
Here’s what you need to know – and what it means for your student loans.
As if the Covid-19 pandemic weren’t enough, the Federal Reserve could raise interest rates up to three times in 2022. With federal student loan repayments restarting on February 1, 2022, student loan borrowers can worry about not just paying off student loans. , but also on what that means for the cost of student loans. (No, Biden will no longer extend the student loan relief). Let’s keep it simple for you.
Student loans: what do the rate hikes mean?
In recent years, the Federal Reserve has kept interest rates low. In 2022, the Federal Reserve has indicated it could raise interest rates up to three times to fight inflation. Usually, when the Federal Reserve increases interest rates, the cost of borrowing increases. This means that your mortgage, for example, could get more expensive. As debt becomes 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 for borrowing money overnight. The change in the federal funds rate affects 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, they can get more expensive if the Federal Reserve increases 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 will not affect your student loans. Why? Federal student loans have fixed interest rates, which means that no matter how interest rates change, you will always have the same interest rate for the duration of your student loans. Having said that, if you have federal student loans issued before July 1, 2006, you can have a variable interest rate student loan. In this case, if the interest rates go up, your variable interest rate will increase and your student loans will become more expensive. (That said, even though variable interest rate student loans could get more expensive, don’t expect Biden to enact a full-scale student loan cancellation before student loan relief ends.)
Private student debt: it depends
While federal student loans today have a fixed interest rate, private student debt is different. How? ‘Or’ What? For private loans, it is 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 go up or down. In contrast, a variable interest rate can change and interest rates go up and down. So, if you have private student debt with a fixed interest rate, the interest rate on your student loan will not be affected. However, if you have private debt, your student loans will become more expensive as interest rates rise. (Here’s everyone who wants Biden to extend student loan relief.)
What are the rates for new student loans?
The interest rate on federal student loans is reset on July 1 of each year. If the Federal Reserve increases interest rates in 2022, then there is a possibility 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 plan to refinance their student loans as temporary student loan relief expires. Why? You can get a lower interest rate, a lower monthly payment, or both. To be eligible for refinancing, you will need a credit score of at least 650, a stable monthly income, be currently employed or have a signed job offer and have sufficient cash flow. monthly payments to pay for your living expenses and current debt payments.
This student loan refinance calculator shows you how much money you can save when you refinance student loans.
The good news is that rates are insanely cheap right now and start as low as 1.74%. If you’re considering refinancing student loans, it’s a good thing to do so now before the Federal Reserve raises interest rates. Why? When the Fed raises rates, refinancing student loans could become more expensive, which means you could save less money on your student loans.
Make sure you are ready to restart student loan payments. Here are some popular ways to save money and pay off student loans faster: