What the Fed’s likely rate hikes will mean for student loan borrowers

Borrowing costs for student loans may soon become higher.

With the economy recovering from the pandemic and inflation being a growing concern, the Federal Reserve plans to hike interest rates three times in 2022.

These increases will impact federal and private student loan borrowers. Here is what you need to know.

Interest rates on federal student loans are reset once a year on July 1. The percentage is linked to the 10-year Treasury bill.

“The new interest rates only apply to new loans,” said higher education expert Mark Kantrowitz.

This is because Federal Education Loans are fixed rate, which means they don’t change after you borrow them, regardless of what the Federal Reserve is doing or how well your finances are. .

Since most of the Fed’s rate hikes could take place after July, new federal student loan borrowers should only see a slight increase in interest rates next year, Kantrowitz said. He expects the 2022 rate to be between 3.5% and 4.5%.

Expect every roughly $ 10,000 you borrow in federal student loans to be about $ 100 per month while you’re paying off.

It depends on whether you are thinking of federal or private student loans.

Those with private student loans who are considering refinancing “should consider pulling the trigger as soon as possible to try to take advantage of current rates,” said Betsy Mayotte, president of the Institute of Student Loan Advisors, an organization non-profit.

Also, those with an adjustable rate loan may want to switch to a fixed rate loan, given that several hikes are planned by the central bank, Kantrowitz said.

The Institute of Student Loan Advisors provides a list of lenders and their terms, including their interest rates and repayment options.

When it comes to federal student loans, experts recommend more caution when it comes to refinancing.

Converting your government loan to a private loan will cause you to lose a number of consumer protections.

For example, federal student loan borrowers can suspend their payments without accrued interest if they are in financial difficulty or are unemployed. The government also offers payment plans capped at a percentage of your income, with some bills ending at $ 0.

In addition, there are a number of rebate programs for federal borrowers.

A large student loan cancellation is also still on the table, but your debt would no longer be eligible if you refinance.

“If the loan cancellation happens, it will happen before the midterm elections,” Kantrowitz said. “So borrowers could delay refinancing for a while. “