Rising interest rates elevates future student loan prices

Juan Arcila

Business Correspondent

After the most recent Federal Reserve Bank meeting, it was decided that rates would rise. With the talk about market turmoil and the possibility of a recession, the question is, how does this effect student loans?  To answer that we must understand what the Fed is first. The Fed is the nickname given to the United States Federal Reserve. They are in charge of managing economic growth, inflation and other economic factors by controlling the monetary supply in circulation.

Photo Courtesy of U.S. Goverment Accountability Office
THE CHART above shows the breakdown of what kinds of government granted student loans. The different types of student loans determine how former students have to repay their loans.

The Fed can raise interest rates by reducing the supply of money, resulting in an increase in interest rates. Inversely they can also increase the supply of money, resulting in a decrease in interest rates.

In recent events the hikes have been small, rising a quarter of a percentage point in December and then again in March. Such a minor increase won’t dramatically affect student loans interest rates in the near future. Consequently, this may change. The Fed’s September projections show the Federal funds rate creeping up through 2019.

If you have Federal student loans and are in school or have graduated in the past few years before the rate hike, then good news: your rates are fixed and they are not affected whatsoever. However, if your loans are from before 2006, your rates are variable, which means that any rate hike or decrease affects your loan.

If you opted to have private student loans, you may be affected. First, find out if you have variable or fixed interest rates. If you have fixed interest rates, the rate will stay the same. If you have variable interest rates, a Fed rate hike will likely result in an increase in your student loans over time.

One Comment

  • Diana says:

    If you are regretting your decision for variable interest rates you can always switch to fixed rate by consolidating or refinancing. For private variable loans, you need to get it refinanced through a lender which will require a credit score of greater than 600. If you are unable to refinance or pay your debt, it may be the time to cut back on some spending because a higher interest rate will affect your monthly cash and your overall budget.

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