Will Student Loans Become More Expensive When the Fed Raises Interest Rates?
The impact of Federal Reserve interest rate hikes on student loans falls firmly into the “it depends” category — mostly having to do who provided the loan and when you got it.
It’s possible your loan payment could rise when the Fed increases interest rates this year. But for many student loan borrowers — especially those with federal student loans — higher rates won’t have any impact at all.
That’s because federal student loans issued over the last 15-and-a-half years have fixed interest rates. No matter how high overall interest rates go, most federal student loans will always have the same rate for the full term of the loan. This has been the case since July 1, 2006, Forbes reported. Now, if you got a federal student loan before that date, you might have a variable interest rate. In this case, the interest rate on the loan will rise along with overall interest rates.
Most federal student loan borrowers won’t have to worry about that for the next few months. In Dec. 2021, the U.S. Department of Education extended COVID-19 emergency relief for student loans through May 1, 2022, according to the studentaid.gov website. The emergency relief includes the following measures for eligible loans:
- Suspension of loan payments.
- 0% interest rate.
- Suspended collections on defaulted loans.
As for new federal student loans, the interest rates on these are reset every July 1. If the Fed hikes rates before then, which seems likely, the interest rate on new federal student loans could go up as well. To look at different interest rates — sorted by year — on federal student loans, visit studentaid.gov and navigate to the year-by-year interest rates page.
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 if you have a variable interest rate, be prepared for your student loan rate (and your monthly payment) to go up when the Fed hikes rates.
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 pushes any higher.