How the Fed Raising Interest Rates Will Affect Student Loan Borrowers

By | February 1, 2016

Paying on your student loans can be a drag, especially if you are trying every month to make sure you have the entire payment down to the penny. For students who are already struggling financially, it can be difficult for them to picture any type of rate increase or hike in their payment amount. But, what if it happens?

In fact, it is. The Federal Reserve has decided that they plan to raise the interest rates on all student loans. This is the first rate increase since 2006!

 

How Will It Affect You?

Okay, first, take a step back and breathe deeply. There is no reason to panic just yet. Any student who has a federal student loan out that dates back to July of 2006 or recent will not be affected by the increased rate. This is because those loans have a fixed interest rate, which means your rate will never change throughout the life of the loan.

No matter what the federal government decides to do with the rates, you are safe as long as you have a fixed rate. That is good news for you, right?

 

So, Who Is Paying Up?

Did you know that federal loans account for roughly $1.1 trillion of the entire student loan debt, which is roughly $1.2 – $1.3 trillion? That is A LOT of unpaid money that is just sitting waiting to be paid, and many of these loans are actually sitting in default and payments have not been made on them.

Now, the big question of who the rate increase effects. It will affect any student who has a loan out prior to July 1st of 2006. This is because the interest rates on those loans were considered variable, which means, when there is a rate hike, the students’ interest rate rises.

Fixed rates protect you from these rate increases, but a variable rate does not as it is variable and fluctuates. Often, students will choose a variable rate because it is more attractive as it may be lower than the fixed rate initially, but as you can see, a variable rate can cause you to pay more for your student loan over time.

Students who receive private student loans often choose the variable interest rate, because of its appeal. No matter when these loans were taken out, the student will experience the rate increase.

 

When Will the Increase Happen?

The rate increase is not expected to simply skyrocket this year or next. In fact, the prediction is that the rate increase will take place gradually over the next few years and you will slowly see the rate increase, but it will not impact you severely at any one point in time.

The rate is expected to close the gap a bit more between where federal interest rates are on fixed loans and variable loans.

 

How Can You Prepare?

As mentioned above, the rates will not skyrocket over night, but they will rise, so it does help to prepare yourself. Overall, you may not see much of an increase in your student loan payment amount, but you can better prepare yourself for the situation by adding a couple extra bucks to your minimum payment amount.

This will help you in a couple of ways, a) when the rate increases and your loan payment amount rises, you will already be paying the newer increased rate, so you will not have to spend anything additional or take a hit immediately. You will already be ready and it won’t hurt your budget; b) until the rate does go up, the additional couple bucks you send in each month will be applied directly to your loan’s principal balance, thus helping pay it off.

If you are worried about the interest rate increase, you have nothing to worry about if you are on a fixed rate plan. If you are on a variable plan, don’t panic too much and consider implementing the tips above to help you prepare for the increase when it does come around.

 

 

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