Federal Interest Rates and Your Student Loans

Curbing Inflation through Reduced Lending with Interest Rate Hikes

Interest rates, inflation, the Federal Reserve, student loans—you can’t listen to the news these days without hearing these words. There’s been a constant struggle throughout the Covid-19 pandemic to balance concerns about public health and the economy, and even as life continues to return to some sense of normalcy, concerns about inflation and a possible recession loom large. In an effort to combat rising prices and keep the economy strong, the Fed has upped rates nearly 10 times in the last year, gradually raising the base rate from 0% to 4.5–4.75%. These rates are meant to slow the flow of credit and cool off price increases and affect every sort of borrowing out there from mortgages to student loans. Regardless of whether federal or private loans, they’re affected by the Reserve’s interest rate, but exactly how varies depending on the type of loan.

Different Types of Student Loans and Federal Interest Rates

Whether your student loans are impacted by the recent interest rate hikes depends what type of loan they are and when you took them out. If you have federal loans, your rate is fixed at the time they were borrowed. That can change if you consolidate them later, but, otherwise, they’re the same for the life of the loan. If you borrowed your loans years ago and don’t plan to change them in any way, you have nothing to fear from the recent increases. If you’re thinking about going back to school or have a kid in the middle of making college plans for the fall, however, you may want to pay attention, however, as experts expect the interest rate on federal student loans to increase in the next few months.

Private Student Loans Are Most Impacted by Federal Rate Increases

If you have private student loans, you likely want to keep an eye on the federal base interest rate. Some private loans have fixed interest rates, which means they, too, stay the same for the life of the loan. Many, however, do not and are those that are generally advertised as having the lowest interest rates when applying or are more forgiving of bad credit history. These types of loans may have an introductory period where the interest rate is fixed, but then will vary based on the market. Every time the Fed increases their base rate, you can bet those variable rate student loans will also increase. Rates are currently increasing rapidly, which could put some borrowers in a sticky situation. 

Options for Combating Rising Rates on Your Student Loans

If you are among those with variable-rate student loans, don’t despair: your rate may be going up right now, but it’s not permanent. Since rates are tied to the market, once the economy levels out again, your rate will almost surely go back down if you can hold on until then. Another option is to try to refinance your variable rate loan into one with a fixed rate, if you can qualify. The key is not to panic! Give your student loan professional a call and they can sift through the noise so you get the clearest picture of your loans, and guide you through your options to the best fit for your situation.