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Laurel Road: How Rising Interest Rates Can Affect Student Loans

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Aug 22, 2022 21:33 EDT

As the Fed continues to raise interest rates to combat inflation, new borrowers as well as those repaying existing loans are being affected. If one already has student loans, one may be wondering exactly how changing rates will affect them and their monthly payments. Here are a few ways rising interest rates may affect student loans, and how it’s possible to get ahead of them. 

Consider refinancing sooner than later

If one is struggling to repay student loans, one may be wondering if now is the right time to refinance. With interest rates on the rise, it may be a good idea to refinance before rates get even higher. If one has good credit and a steady income, student loan refinancing could mean a lower interest rate and/or lower monthly payments. However, if one is still in school with less predictable incomes and/or is still building strong credit, it may be better to wait. 

Ultimately, the best way for borrowers to decide whether to refinance their student loans is to compare their current interest rate with the rates being offered by other lenders. If a borrower can get a lower rate, it may be worth refinancing. If not, a borrower may want to wait until rates start to stabilize again.

For borrowers who have a variable interest rate

If one has loans with variable interest rates, one may be feeling a little anxious about what rising rates mean for their monthly payments. Most student loans have a fixed interest rate, which means that monthly payments will stay the same for the life of the loan. However, some loans (including some private loans and older federal student loans) have a variable interest rate that can fluctuate over time based on the index they are tied to. This means that when these rates go up, so do borrowers’ student loan interest rates  — and their monthly payment.

So, how can borrowers with variable interest rates prepare for rising rates? It could be a good idea to consider making extra payments now while the payments are still relatively low. Refinancing and consolidation may also be good options, which could help one lock in a lower interest rate and save money in the long run. And of course, staying on top of payments and keeping debt-to-income (DTI) ratio low will always help improve a credit score — which can come in handy for borrowers who want to refinance in the future.

For new borrowers

If one is taking out a new student loan, it’s important to be aware of the potential impact of rising interest rates. One may be locked in at a higher interest rate, and the rate for new loans taken out each semester may continue to rise year-on-year. 

As a new borrower, one may want to consider seeking out a fixed-rate loan, which would protect a borrower from potential increases. Refinancing may still be an option in the long term if interest rates drop. But remember, if one refinances federal student loans with a private lender, one will lose access to federal programs, such as income-driven repayment, federal forbearance, and any other benefits offered to federal borrowers. Learn more at studentaid.gov. Ultimately, while there aren’t a ton of options for new borrowers who are still building credit, borrowers should do their research to understand all of their options.

Contact: michael.bertini@iquanti.com

Source: Laurel Road

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