With the Federal Reserve’s announcement to increase the federal funds rate, many consumers are worried about how this will affect terms for borrowing money and accessing credit, including the impact on student loans.
The short answer: Some student loan borrowers will pay more interest.
Most student loan borrowers depend on federal student loans, which have had a fixed interest rate since 2006. Although 1.4 million people yearly also depend on private student loans, which can have either a fixed rate or a variable rate that’s connected to either the LIBOR, prime or T-bill rates.
When the Fed increases these variable rates, borrowers with variable-rate loans will likely pay more interest. However, it will depend on the benchmark, according to CNBC.
So what can borrowers do? They should be proactive even though the impact of the rate hike won’t immediately be felt. However, at some point, higher payments will hit variable-rate student loan holders.
Options for Rising Payments
With a refinancing option, this can combine current federal and private loans into a new one through a private lender. Before considering this, it’s important to have a good credit history and credit score as well as steady job, ideally well paying. This can help with obtaining competitive interest rates.
Here are some of the benefits of refinancing:
You can refinance with a fixed rate. A switch to a fixed interest rate loan can help alleviate concerns about increasing interest rates by locking in a rate and protecting against future hikes. To explore this option, borrowers can refinance their student loans through a new lender. If the borrower’s credit is lacking, using a cosigner with good credit might help them secure a lower rate.
You can combine all loans. After deciding to refinance and selecting a new, lower interest rate, multiple student loans can be combined into one loan at either a bank or an online lender. One perk of this is one repayment to a single lender vs. multiple ones.
You can extend the repayment period. Private loan repayment terms vary across lenders, with most offering five to 20 years for repayment, but extending this monthly student loan payment is an option when refinancing. However, extending loan terms means paying additional interest over the long run.
Just be aware that if you refinance your federal student loans with a private lender, you will most likely lose the federal loans’ borrower protections and flexibility – like income-based repayment plans, student loan rehabilitation for defaulted loans, and forbearance. Borrowers should aim to choose a private lender that can give them an affordable monthly payment and which offers flexibility for borrowers in times of financial hardship.
Author: Mike Brown
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