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The Federal Reserve’s interest rate hike on Wednesday and its plan to raise the rate several more times in 2022 will make borrowing more expensive for some consumers.
Some people currently holding student loans and others planning to take out a loan for their education soon will be among those affected.
Here’s what you need to know.
What does this mean for my federal student loans?
To begin with, since the interest rate on federal student loans is fixed, higher rates will not affect current borrowers.
The interest rate on federal student loans taken after July 1 will be based on the last 10-year Treasury auction in May, which is also a benchmark for mortgages and is subject to Fed action.
Higher education expert Mark Kantrowitz expects the new student loan rate 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 this surge, he said.
But this knowledge won’t do you much good: you can’t try to avoid a rate hike by taking out a loan early. Loans for the 2022-2023 academic year must be taken after July 1.
Be aware, however, that the rate on most federal student loans is currently 0% thanks to pandemic-era assistance provided by the US Department of Education.
The interest waiver and payment suspension, which has been in effect since March 2020, is currently due to end in May; however, the Biden administration appears to be considering extending the hiatus.
…and my private student loans?
College tuition has skyrocketed, with annual public college tuition, including room and board, over $18,000. Meanwhile, one year of private college education costs about $47,000.
There are limits on how much students can receive in federal loans — the maximum a student can borrow in a year is $12,500 — and so many are turning to private funding to finish their account.
These loans are expected to rise in price as the Fed continues to raise rates.
For current private student loan holders, the interest rate will not change if you have a fixed rate loan. On the other hand, those with variable rate loans may see a surge.
Going forward, Kantrowitz expects fixed rates on new private student loans to rise by 1.5% to 1.9% depending on the length of the term. Rates are currently all over the card, ranging from 3% to 18%.
For those considering private student loans, Kantrowitz recommends looking at prices.
“Check the rates of multiple lenders by applying for multiple private student loans and then compare the cost of different loan offers,” he said. “This will include consideration of interest rates, fees, loan rebates and other factors that affect the cost of a loan.”
Other proponents advise avoiding private student loans altogether, as turning to funding is often a sign that you’re borrowing too much for your education.
“We almost always advise against taking private loans,” said Betsy Mayotte, president of the nonprofit Student Loan Counselors Institute.
Should I refinance before rates go up more?
If you have private student loans, now is the time to see if you can refinance them at a lower rate.
“It is likely that student loan refinancing rates will increase as a result of the Fed rate hike,” said Anna Helhosky, student loan expert at Nerdwallet.
However, proponents warn against refinancing your federal student loans into a private loan for the time being, even if you can get a lower rate. This is because the interest suspension on most federal student loans could continue for several more months.
At the same time, the Biden administration is now weighing a massive repeal. If you convert your federal loan to private, you will most likely miss out on this relief.