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The impact of Federal Reserve interest rate hikes on student loans falls firmly into the “it depends” category – primarily about who provided the loan and when you got it.
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This is because federal student loans issued over the past 15 and a half years have fixed interest rates. No matter how high the overall interest rates are, most federal student loans will always have the same rate for the life of the loan. This has been the case since July 1, 2006, Forbes reported. Now, if you got a federal student loan before then, you might have a variable interest rate. In this case, the interest rate on the loan will increase with the overall interest rates.
Most federal borrowers won’t have to worry about that for the next few months. In December 2021, the US Department of Education extended COVID-19 emergency student loan assistance through May 1, 2022, according to the studentaid.gov website. Emergency assistance includes the following measures for eligible loans:
- Suspension of loan repayments.
- 0% interest rate.
- Collections suspended on delinquent loans.
As for the new federal student loans, the interest rates on these are reset every July 1st. If the Fed raises rates before then, which seems likely, the interest rate on new federal student loans could also rise. To view the different interest rates – sorted by year – on federal student loans, visit studentaid.gov and go to the annual interest rates page.
For those with private student loans, it’s a different story. If you have a fixed interest rate for the term of the loan, then no worries – any decision by the Fed will have no impact. But if you have a variable interest rate, be prepared for your student loan rate (and monthly payment) to rise when the Fed raises rates.
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According to Credible.com, variable rate student loan rates are generally tied to one of two benchmarks: the London Interbank Offered Rate (LIBOR) and the prime rate. The prime rate and LIBOR closely track the federal funds rate, so any decision 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 higher.
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