How Will the Fed Rate Increase Affect Student Loans?


In December 2015 the Federal Reserve raised interest rates from 0% – 0.25% to 0.25% – 0.5%. As rates increase, banks follow suit by adjusting their own accruals for future and existing accounts. The Fed rate increase could also mean higher interest rates and minimum payments for millions of student borrowers — myself included.

As someone who almost fell off a financial cliff, I have firsthand experience of how the shifting marketplace can affect personal finance. Like many college graduates, I’m still paying for my education. Although I have managed to reduce my debt by 70 percent in the past eight years, I still have a dreaded loan payment at the beginning of each month. Imagine my surprise this month when the minimum payment due had increased by almost $100. If you are in the same boat, what will the Fed rate increase mean for your loans? Read on to learn the answers and a few strategies to keep your budget afloat.

When it comes to the Fed rate increase:

  • Federal loans are safe (for now). Federal student loans are backed by the U.S. government and have fixed interest rates. This means that existing loans are not affected by the Fed rate increase. That said, interest rates on loans disbursed after July 2016 are likely to be affected by the yield of the 10-year U.S. Treasury note that funds education lending. Depending on the math, new borrowers could see a slight increase in federal loan interest rates.
  • Private loans are vulnerable. As I learned, private loans with variable interest rates are at the changes thanks to the Fed rate increase. As the market shifts, interest rates attached to private loans fluctuate as well, leaving room for uncertainty and increased minimum payments.

What can you do?

While you can’t control federal interest rates, there are a few ways to minimize the impact in your household. Consider:

  • Consolidating. If private student loans are threatening your financial safety, consider consolidating your debt. Opting for a single loan with a fixed interest rate creates stability and better yet — predictability — in the budgeting process. Talk to a financial planner about your options and allow them to help you choose a fair and wise plan.
  • Paying off your loans. Easier said than done, right? Still, focusing on loan elimination is an effective way to avoid higher interest charges and long-term debt. It will also reduce your Debt-to Income (DTI) ratio and credit utilization ratio, improving your credit score in the process. Consider cutting back in favor of debt reduction.
  • Seeking loan reimbursement. If you can’t afford to repay your loans, why not find someone who can? Many companies offer federal loan reimbursement for skilled employees. While this won’t help the effects to your private loans, unloading additional debt will free up your budget and help you redistribute funds where you need them most.

The bottom line: College is expensive, and it’s important to minimize the backlash after graduation. Review your debts carefully to determine how the Fed rate increase affects you. Education is the first step.

Related Articles: 

How Student Loans Affect Your Credit Score

How Does the Interest Rate Increase Affect Loans in 2016?

New Year’s Resolutions for Students: Graduating Without Debt


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