How the Federal Reserve’s rate hike affects student borrowers
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The Federal Reserve’s interest rate hike on Wednesday and its plan to raise the rate multiple times in 2022 will make borrowing more expensive for some consumers.
Some people who currently hold student loans and others who plan to borrow soon for their studies will be among those who will be affected.
Here’s what you need to know.
What does this mean for my federal student loans?
For starters, since the interest rate on federal student loans is fixed, current borrowers won’t be impacted by higher rates.
The interest rate on federal student loans taken out after July 1 will be based on the last 10-year Treasury bill auction in May, which is also the benchmark for mortgages and is influenced by the actions of the Fed.
Higher education expert Mark Kantrowitz expects the new rate on undergraduate loans to be between 4% and 4.5%, up from 3.7% currently. About 5 million people take out student loans each year and could see that spike, he said.
But that knowledge isn’t much use to you: you can’t try to escape rising rates by borrowing before then. Loans for the 2022-2023 academic year must be taken out after July 1.
Keep in mind, however, that the rate for most federal student loans is currently 0%, thanks to pandemic-era relief provided by the US Department of Education.
The interest relief and suspension of payments, in effect since March 2020, is currently scheduled to end in May; however, the Biden administration appears to be considering extending the hiatus longer.
…and my private student loans?
The cost of a college education has risen sharply, with the annual price of a public college, including room and board, rising to over $18,000. A year at a private college, meanwhile, costs around $47,000.
There are limits to how much students can take out in federal loans — the maximum an undergraduate student can borrow in a year is $12,500 — and so many people are turning to private financing to finish covering their bill.
These loans are expected to become more expensive as the Fed continues to raise rates.
For current private student loan holders, your interest charges will not be impacted if you have a fixed rate loan. Those with variable rate loans, on the other hand, could see a slight uptick.
Going forward, Kantrowitz expects fixed rates on new private student loans to increase between 1.5% and 1.9%, depending on the length of the term. Rates are currently all over the map, ranging from 3% to 18%.
For those considering private student loans, Kantrowitz recommends shopping around.
“Check rates from multiple lenders by applying for multiple private student loans, then compare the cost of different loan offers,” he says. “This will include consideration of interest rates, fees, loan discounts and other factors that affect the cost of the loan.”
Other proponents say to try to avoid private student loans altogether, since turning to financing is often a sign that you’re borrowing too much for your education.
“We almost always advise against private lending,” said Betsy Mayotte, president of the Institute of Student Loan Counselors, a nonprofit organization.
Should I refinance before rates rise further?
If you have private student loans, now might be a good time to see if you can refinance at a lower rate.
“Student loan refinance rates are likely to rise following the Fed’s rate hike,” said Anna Helhoski, student loan expert at Nerdwallet.
However, advocates caution against refinancing your federal student loans into a private loan at this time, even if you can get a lower rate. Indeed, the suspension of interest on most federal student loans can last for months longer.
At the same time, the Biden administration is currently considering a broad cancellation. If you convert your federal loan to a private loan, you will likely miss out on this relief.