Will Student Loans Become More Expensive After the Fed Interest Rate Increase?

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The impact of the Federal Reserve’s latest interest rate hike on student loans falls firmly into the “it depends” category — mostly having to do with who provided the loan and when you got it. Whether the increased rate will affect your student loan interest also depends on your loan type.

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The good news for many student loan borrowers is higher interest rates won’t have any impact at all right now. Current federal student loan rates are fixed and won’t change.

Future Federal Loans

Interest rates for new federal loans are set yearly in July, using the results from the 10-year Treasury bond auction held in May. Last year, federal undergraduate loans disbursed after July 1 carry a rate of 4.99%, an increase from last year’s rate of 3.73%.

Most federal student loan borrowers won’t have to worry about that for the next few months. In Nov. 2022, the U.S. Department of Education extended COVID-19 emergency relief for student loans through June 30, 2023, as GOBankingRates previously reported. The emergency relief includes the following measures for eligible loans:

  • Suspension of loan payments.
  • 0% interest rate.
  • Suspended collections on defaulted loans.

Private Loans

For those with private student loans, it’s a different story. If you have a fixed interest rate for the life of the loan, then no worries — any moves by the Fed will have no impact. But borrowers of variable-rate private student loans can expect to pay more as existing loans are connected with benchmarks that reflect the federal funds rate. New loans will be subject to the latest rate hikes in the month the loan was taken.

Save for Your Future

Variable-rate student loans rates are typically tied to one of two benchmarks: the London Interbank Offered Rate (LIBOR) and the prime rate, according to Credible.com. The prime rate and LIBOR both track the federal funds rate closely, so any move by the Fed to raise short-term rates likely means rate increases on variable-rate student loans.

If you have a variable-rate student loan — or even a fixed-rate loan with a high-interest rate — you might consider refinancing now to lock in the current Fed rate before it gets any higher.

Mehedi Hasan Shoab contributed to the writing of this article.

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