Student Loans and the Fed Raising Rates
It’s no secret that these days, and to a lesser extent in days past, student loans are getting out of control. According to a recent study from Forbes, there’s $1.3 trillion of total outstanding debt, with the average 2016 graduate carrying around $37,000 when he/she walks across the stage. Not only is this crippling to the graduates, but for many of the loans they take out, parents have to cosign with them. And while the federal government offers loans to almost every student with a low fixed rate, sometimes federal loans aren’t enough. If that ends up being the case, students turn to private lenders for financial aid. This is where things get dicey, especially in these times.
The Fed doesn’t make it a secret that it is their wish to raise rates to 2% this year. While this has a myriad of effects on the economy, what we’re talking about today is the effect raising rates will have on those with student loans. As mentioned previously, the federal government offers fixed rate loans, which means that the agreed-upon interest rate will not move, even in the case of raising rates from the Fed. Now, if the government doesn’t offer enough aid, students turn to private lenders. There, students can get either a fixed rate loan, like the government would offer, or a variable rate. It’s these variable rate private lender loans that are affected by raising rates. Put basically, if you have a variable rate loan and the Fed raises rates, your variable rate will go up. This means higher monthly payments, which may affect your entire budget and spending habits. This becomes more and more prevalent as more rate hikes happen, as the Fed is planning to do.
So, what can you do? First, check what your payment period for the loan is. If it isn’t too long, you may be able to pay it off before rates get hiked. Second, you can research refinancing options to get a fixed interest rate. Refinancing can be a tricky business, so do your research and project what impacts various interest rates will have on your monthly payments. This way, when you go to different banks or credit unions, you’ll be more prepared when/if they offer you a fixed rate. Lastly, if refinancing isn’t an option and your repayment period is decently long, you may just have to batten down the hatches and ride out the rate hikes. Your rate and monthly payments may go up, but that’s something you’ll just have to be prepared for and adapt to. Take a look at your budget, see where expenses can be cut, and adjust it accordingly.
Student debt can be a huge ball and chain on not only college graduates, but their families as well. We see many cases where the parents of the graduate are responsible for much of the debt their child incurs, and if the parents are retired or in a poor situation financially, student debt can be the straw that breaks the camel’s back. If you need help or advice about how to take care of student debt and put yourself on the track for success, do what you can to get it. Unlike student debt, the peace of mind that professional financial help provides is immeasurable.