Will student loans get more expensive when the Fed raises interest rates?

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The impact of Federal Reserve interest rate hikes on student loans falls firmly into the “it depends” category – primarily about who provided the loan and when you got it.

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Your loan repayment may increase when the Fed raises interest rates this year. But for many student borrowers, especially those with federal student loans, higher rates won’t have any impact.

This is because federal student loans issued over the past 15 and a half years have fixed interest rates. No matter how high the overall interest rates are, most federal student loans will always have the same rate for the life of the loan. This has been the case since July 1, 2006, Forbes reported. Now, if you got a federal student loan before then, you might have a variable interest rate. In this case, the interest rate on the loan will increase with the overall interest rates.

Most federal borrowers won’t have to worry about that for the next few months. In December 2021, the US Department of Education extended COVID-19 emergency student loan assistance through May 1, 2022, according to the studentaid.gov website. Emergency assistance includes the following measures for eligible loans:

  • Suspension of loan repayments.
  • 0% interest rate.
  • Collections suspended on delinquent loans.

As for the new federal student loans, the interest rates on these are reset every July 1st. If the Fed raises rates before then, which seems likely, the interest rate on new federal student loans could also rise. To view the different interest rates — sorted by year — on federal student loans, visit studentaid.gov and navigate to the annual interest rates page.

For those with private student loans, it’s a different story. If you have a fixed interest rate for the term of the loan, then no worries – any decision by the Fed will have no impact. But if you have a variable interest rate, be prepared for your student loan rate (and monthly payment) to rise when the Fed raises rates.

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According to Credible.com, variable rate student loan rates are generally tied to one of two benchmarks: the London Interbank Offered Rate (LIBOR) and the prime rate. The prime rate and LIBOR closely track the federal funds rate, so any decision by the Fed to raise short-term rates likely means rate increases on variable-rate student loans.

If you have a variable-rate student loan — or even a fixed-rate loan with a high interest rate — you might consider refinancing now to lock in the current Fed rate before it pushes higher.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who has previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has earned him awards from the North Carolina Press Association, Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.

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