Time to lock in Fixed-Rate Student Loans?

Michael Lux Blog, Consolidation, News, Student Loans 0 Comments

Today we will take a very simplified look at some very complicated economic subjects.  Nobody knows what interest rates will look like next month, let alone five years from now.  However, the current economic conditions and political climate could mean that student loan interest rates may be on their way up.

The Current Situation

Most variable rate student loans are tied to either the 10-year treasury bond or the LIBOR rate.  What this means is that as these interest rates go up or down, variable-rate student loans also go up and down.

Due to the global recession, these rates have stayed near historic lows for the past five plus years.

What has changed?

Some media outlets are calling it the Trump Effect.  The election of Donald Trump has already resulted in an increase in interest rates.  This is because markets expect trump to cut taxes, and decrease financial regulations.  This combination often results in inflation – mean one dollar in the future does not go as far as a dollar today.  Some inflation is expected in any economy, but in a high inflation economic environment, interest rates need to be higher.  Put very simply: a bank won’t lend you $1,000 today if by the time you pay it back that $1,000 is far less valuable.  The bank will charge higher interest rates to prevent this from happening.  They want all of their loans to be profitable.

What does this mean for student loans?

If you look into refinancing or consolidating your student loans, you will see many companies offering rates at around 2%.  These loans are variable-rate loans.  As 10-year bond rates and the LIBOR go up, the rates on these loans will also go up.  If you signed up for one of these loans 4 years ago, your rates have stayed super low and it has been a very smart move to date.

Fixed-rate loans currently start at about 3.5%, depending on the lender.  The advantage to the fixed-rate loan is that the interest rate will never go up.  If rates jump up to 6%, which could easily happen, that 3.5% fixed-rate loan suddenly looks like a great deal.

Should I look for a fixed-rate loan?

Without a crystal ball or a time machine, it is hard to say for sure.  However, there are some factors worth considering if you are trying to decide whether or not you need a fixed-rate on your student loans.

Fixed-rate loans make sense if:

  • You expect to be paying back your loan for a very long time – interest rates rise and fall, but locking in a low fixed-rate ensures that you will never have to worry about these market fluctuations.
  • You cannot afford a rate increase – if you won’t be able to weather the storm if interest rates go way up, it is best to play it safe and lock in the low rate.
  • You think interest rates will definitely be going up – nobody knows the future, but if you believe rates will continue up, bet on your instincts.

How do I lock in a fixed-rate loan?

Unfortunately, you cannot just call your lender and ask that your rate be converted from a variable-rate loan to a fixed-rate loan.  The process of changing your loan terms is called refinancing or consolidation.  Keep in mind that refinancing your loans changes more than just the interest rates.  You end up with a new lender and new loan terms.  The consequences go far beyond the interest rate on the loans.

If you are considering going this route, be sure to check out our student loan consolidation overview.  There you will find a list of companies offering these services, a comparison of rates, and more in-depth explanation of the pros and cons of choosing this option.