Student loan interest rates have been hovering around record lows for years as the U.S. economy clawed its way out of the great recession. That all started to change during the last few months, and now there’s some expectations that the Federal Reserve may move to raise short term interest rates in March which can have an impact on certain student loan borrowers.
According to a report in The Wall Street Journal, Federal Reserve Bank of Philadelphia head Patrick Harker said he could see a move by the Fed to raise short term rates when the central bank meets next month on March 14 and 15. Harker noted that he hasn’t completely decided what could go down at the meeting while saying that the outcome will be based on how the economy and fiscal policy is performing. Meanwhile, Federal Reserve Chairwoman Janet Yellen said in a testimony to Congress Tuesday that it’s “unwise” to hold off for too long in raising interest rates. She noted that more rate increases are appropriate if the economy remains the way it has been performing. In December, the Fed raised rates by 0.25% for the first time in all of 2016.
With the writing on the wall, student loan borrowers should be a little concerned. After all, the cost of borrowing in general goes up when the Federal Reserve increases interest rates whether it’s a car loan, credit card bill, or mortgage. But there is a caveat: the interest rate will only increase on current loans, including student loans, with variable rate or loans that have an interest rate that fluctuates. In the mortgage market, they are known as adjustable rate mortgages and were partly to blame for the record foreclosures of a few years ago. Once the interest rate went up back then, tons of borrowers couldn’t afford their monthly mortgage payment anymore.
In the case of student loans, those with federally backed debt don’t have to worry about the impact of an interest rate hike because those loans have fixed rates. This means the interest rate won’t change over the life of the loan. For borrowers who had a Federal Stafford Loan prior to 2006, they need to check if the rate is fixed or variable since many were variable before the 2006-2007 school year.
Private student loan interest rates are subject to change for borrowers if they went with a variable rate loan over a fixed rate loan. If it’s fixed, then you are in the clear when the Fed moves in March. If it’s variable, then it may be a good time to think about finding the best place to refinance student loans.
Thankfully, interest rates are still low. And there’s still time to refinance from a variable rate student loan into a fixed rate loan. The key is to act ahead of the Fed’s potential March move.
Author: Donna Fuscaldo
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