Laurel Road: How Rising Interest Rates May Affect Student Loans | New
NEW YORK, Aug. 22, 2022 (GLOBE NEWSWIRE) — As the Fed continues to raise interest rates to fight inflation, new borrowers as well as those repaying existing loans are affected. If one already has student loans, one might wonder exactly how changing rates will affect them and their monthly payments. Here are some ways rising interest rates can affect student loans and how you can get ahead of them.
Consider refinancing sooner rather than later
If one is struggling to repay student loans, one may wonder if now is the time to refinance. With interest rates on the rise, it may make sense to refinance before rates rise even further. If one has good credit and a stable income, refinancing a student loan may mean a lower interest rate and/or lower monthly payments. However, if one is still in school with less predictable income and/or still building strong credit, it may be best to wait.
Ultimately, the best way for borrowers to decide whether or not to refinance their student loans is to compare their current interest rate with the rates offered by other lenders. If a borrower can get a lower rate, it may be worth refinancing. Otherwise, a borrower may want to wait until rates begin to stabilize again.
For borrowers who have a variable interest rate
If one has loans with variable interest rates, one may feel a bit worried about what rising rates mean for their monthly payments. Most student loans have a fixed interest rate, which means monthly payments will stay the same for the life of the loan. However, some loans (including some private loans and older federal student loans) have a variable interest rate that can fluctuate over time depending on the index to which they are linked. This means that when these rates go up, so do borrowers’ student loan interest rates – and their monthly payment.
So how can variable interest rate borrowers prepare for a rate hike? It might be a good idea to consider making additional payments now while payments are still relatively low. Refinancing and consolidation can also be good options, which could help lock in a lower interest rate and save money in the long run. And of course, staying on top of payments and maintaining a low debt-to-income ratio (DTI) will always help improve a credit score – which can be helpful for borrowers looking to refinance in the future.
For new borrowers
If taking out a new student loan, it is important to be aware of the potential impact of rising interest rates. One can be locked into a higher interest rate and the rate of new loans taken out each semester can continue to increase from year to year.
As a new borrower, one can consider looking for a fixed rate loan, which would protect the borrower from potential increases. Refinancing may still be a long-term option if interest rates drop. But remember, if one refinances federal student loans with a private lender, one will lose access to federal programs, such as income-contingent repayment, federal forbearance, and any other benefits available to federal borrowers. Learn more at studentaid.gov. Ultimately, while there aren’t a ton of options for new borrowers who are still building credit, borrowers should do their research to understand all of their options.
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