The Federal Reserve raised its benchmark rate by 0.25% on March 16, and it's slated to raise interest rates several more times this year to combat sky-high inflation. This could cause rates to rise on a number of financial products, including student loans.
While the Fed's quarter-point rate hike won't likely impact federal borrowers with fixed-rate student loans, it could increase the cost of borrowing for those with variable-rate private student loans.
Keep reading to learn more about how the Fed's March rate hike could impact your student loan debt, as well as how to refinance to a private loan at a low, fixed rate. You can visit Credible to compare student loan refinance rates for free without impacting your credit score.
Borrowers with variable-rate student loans will likely pay more
When the Fed raises its federal funds rate, the cost of variable-rate borrowing products — such as credit cards and certain types of student loans — are likely to increase. On the other hand, fixed-rate debts won't be impacted. This means borrowers who have federal or private student loans with a fixed interest rate don't have to worry about changes to their current debt.
However, borrowers with variable-rate student loans may feel the effects of the Fed's monetary policy. If your student debt has a variable interest rate, then your rate will change as the Fed raises rates. This can make your debt more expensive to repay, with higher monthly payments and total interest charges over the life of the loan.
The Fed's 2022 rate hikes won't just impact current student loan borrowers, though. College students who plan to borrow fixed-rate federal student loans for the fall semester will likely see higher rates later this year.
As federal student loans may become more expensive, borrowers may consider taking out a fixed-rate private loan with more favorable terms. Whereas federal borrowing rates depend on when the loan was originated, private student loan lenders set interest rates based on creditworthiness.
Applicants with a good credit score and low debt-to-income ratio (DTI) may see lower rates when borrowing private student loans when compared with current federal student loan rates. This means a fixed-rate private student loan may be cheaper and come with lower monthly payments for well-qualified applicants.
Keep in mind that private student loans don't come with the same protections as federal loans, such as income-driven repayment plans (IDR) and select types of student loan forgiveness. But if you don't plan on utilizing these programs, then private loans may offer more favorable terms for financing your education.
You can learn more about private student loans by getting in touch with a knowledgeable loan expert at Credible.
Consider refinancing variable-rate loans at a low, fixed rate
As interest rates on variable student loans are poised to rise, some borrowers may consider switching to a fixed-rate loan. This would help you lock in your rate for the entirety of your loan term, so you won't be affected by future Fed rate hikes. Here's how to refinance your variable-rate loan at a lower interest rate:
- Check your credit score. Applicants with good or excellent credit will see the lowest rates possible, while those with fair credit may not see favorable terms. If you have bad credit, you may consider refinancing student loans with a cosigner.
- Compare rates across multiple lenders. Since private student loan rates vary from one lender to the next, it's important to compare offers to find the best interest rate for your financial situation. You can visit Credible to get prequalified through multiple private lenders without harming your credit score.
- Choose the best offer and formally apply. Once you've found a fixed-rate student loan that works for your needs, you'll fill out an application through the lender. This will require a hard credit check, which will have a temporary and minimal impact to your credit history.
If you're not sure if refinancing to a fixed-rate student loan is the right move for you, you can use a student loan calculator to see your estimated repayment terms, including your monthly student loan payments. You can also browse current student loan interest rates in the table below and by visiting Credible.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column.