Laurel Road: How Rising Interest Rates Can Affect Student Loans | news
NEW YORK, Aug. 22, 2022 (GLOBE NEWSWIRE) — As the Fed continues to raise interest rates to fight inflation, both new borrowers and those repaying existing loans have been hit. If you already have student loans, you might be wondering how exactly interest rate changes will affect them and their monthly payments. Here are some ways that rising interest rates can affect student loans and how to work around them.
Consider refinancing sooner rather than later
If you’re struggling to pay off student loans, you may be wondering if now is the right time to refinance. When interest rates are rising, it can be a good idea to refinance before interest rates get even higher. If you have good credit and a steady income, refinancing a student loan could mean a lower interest rate and/or lower monthly payments. However, if you’re still in school and on a less predictable income and/or still building strong credit, you might be better off waiting.
Ultimately, borrowers can best decide whether to refinance their student loans by comparing their current interest rate to other lenders’ interest rates. If a borrower can get a lower interest rate, refinancing may be worthwhile. If not, a borrower may want to wait for interest rates to stabilize again.
For variable rate borrowers
If you have variable rate loans, you might be a little worried about what rising interest rates will mean for your monthly payments. Most student loans have a fixed interest rate, which means the monthly payments will remain the same for the life of the loan. However, some loans (including some private loans and senior federal student loans) have a variable interest rate that can fluctuate over time based on the index to which they are tied. This means that as those interest rates rise, so do student loan interest rates — and their monthly payments.
So how can adjustable rate borrowers prepare for rising interest rates? It might be a good idea to start thinking about additional payments now while payments are still relatively low. Refinancing and consolidation can also be good options that could help you lock in a lower interest rate and save money in the long run. And of course, staying on top of payments and keeping your debt-to-income (DTI) ratio low always helps improve credit scores — which can be useful for borrowers looking to refinance in the future.
For new borrowers
When taking out a new student loan, it’s important to be aware of the potential impact of rising interest rates. One can be locked into a higher interest rate, and the interest rate on new loans taken out each semester can continue to rise from year to year.
As a new borrower, you should consider seeking a fixed rate loan that will protect a borrower from potential increases. If interest rates are falling, refinancing can still be an option in the long term. However, remember that if you refinance federal student loans with a private lender, you will lose access to federal programs such as such as income-based repayment, federal forbearance, and any other benefits offered to federal borrowers. Learn more at studentaid.gov. Ultimately, while there aren’t many options for new borrowers who are still building credit, borrowers should do their research to understand all of their options.
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