How the Federal Reserve’s rate hike impacts student loan borrowers
The Federal Reserve’s interest rate hike on Wednesday and its plan to lift the rate several more times in 2022 will make borrowing more expensive for certain consumers.
Some people who currently hold student loans and others planning to soon borrow for their education will be among those impacted.
Here’s what you need to know.
To begin, 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 note auction in May, which is also the benchmark for mortgages and is influenced by the Fed’s actions.
Higher-education expert Mark Kantrowitz expects the new rate on undergraduate loans to be between 4% and 4.5%, up from 3.7% now. Around 5 million people take on student loans each year and could see that spike, he said.
But this knowledge doesn’t do you much good: You can’t try to evade the rate increase by borrowing ahead of that deadline. Loans for the 2022-2023 academic year must be taken out after July 1.
Keep in mind, though, that the rate on most federal student loans is currently at 0%, thanks to pandemic-era relief delivered by the U.S. Department of Education.
The interest waiver and payment pause, which has been in effect since March 2020, is currently scheduled to end in May; however, the Biden administration appears to be considering extending the break for longer.
The cost of attending college has been rising steeply, with the annual price tag of a public college, including room and board, at more than $18,000. One year at a private college, meanwhile, costs around $47,000.
There are limits to how much students can take out in federal loans — the most an undergraduate can borrow in a year is $12,500 — and so many turn to private financing to finish covering their bill.
These loans are expected to get pricier as the Fed continues raising rates.
For current holders of private student loans, your interest charge won’t be impacted if you have a fixed-rate loan. Those with variable-rate loans, on the other hand, could see an uptick.
Going forward, Kantrowitz anticipates the 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 as high as 18%.
For those considering turning to private student loans, Kantrowitz recommends shopping around.
“Check several lenders’ rates by applying to multiple private student loans, then compare the cost of the various loan offers,” he said. “This will include consideration of interest rates, fees, loan discounts and other factors that affect the cost of the loan.”
Other advocates say to try to avoid private student loans altogether, as turning to the financing is often a sign that you’re overborrowing for your education.
“We almost always advise against private loans,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.
If you have private student loans, now may be a good time to see if you can refinance to a lower rate.
“It’s likely student loan refinancing rates will increase as a result of the Fed rate hike,” said Anna Helhoski, student loan expert at Nerdwallet.
However, advocates caution against refinancing your federal student loans to a private loan at the moment, even if you can pick up a lower rate. That’s because the suspension of interest on most federal student loans may go on for months longer.
At the same time, the Biden administration is currently weighing broad cancellation. If you convert your federal loan into a private one, you’d likely miss out on this relief.