Does the Federal Reserve Rate Affect Student Loans?

Michael Lux Blog, News, Student Loans 0 Comments

When the Federal Reserve raises interest rates, the impact isn’t immediately felt in the student loan world.  However, the Fed raising rates does have some impact on student loans.  Whether or not the Fed rate change impacts your student loans will depend upon the loans that you have and your personal circumstances.

Federal Loans

For starters, the Federal Reserve and loans from the Federal Government are two very different things.  When the Federal Reserve increases interest rates it does not mean the rates on your federal student loans will immediately be going up.

Most federal student loans are actually fixed-rate loans.  This means that no matter what happens with interest rates and the economy, the rates on your student loans stay exactly the same.

Private Loans

When it comes to private loan interest rates, things get a little more complicated.  For starters, many private loans are variable-rate loans.  This means that when interest rates change, the interest rates on your loans also change.

However, the Federal Reserve raising interest rates doesn’t necessarily mean that the variable-rate student loan will be changing.  This is because there are many different measures of interest rates.  Most private lenders look at the LIBOR or treasury bonds for determining the interest rate for the variable-rate student loans.  As the rates associated with treasury bonds and/or LIBOR change, student loan interest rates will change.

Even though the rates that control variable-rate student loans are not directly tied with the Federal Reserve rate, they are connected.  Put simply, interest rates are a measure of the cost of borrowing money.  As the fed raises rates, the cost of borrowing money increases.  If the Fed raises rates, it is a pretty good indication that an increase on your student loan interest rates is in your future.

Refinancing Options

The people who are most directly affected by a rate hike would be those who are considering refinancing or consolidating their student loans.  The chairman of the Federal Reserve, Janet Yellen, has made it clear that she expects rates to gradually increase over the next couple years.

As rates go up, the savings from consolidating with another company drops.  Currently, borrowers can get variable-rate loans under 2% from a variety of companies.  Many of these same lenders offer fixed-rate loans in the 3 to 4% range.  As the economy improves and interest rates increase, lenders will stop offering rates at such low levels.

Ultimately, interest rates are always changing.  Different economic factors can push them in one direction or the other.  It is therefore impossible to predict exactly where interest rates will go.  That being said, most indicators seem to point to interest rates increasing in both the short-term and the long-term.  If you are considering refinancing your student loans to lock in lower interest rates, the window to maximize your savings may be closing.

Bottom Line

When the Federal Reserve raises interest rates it doesn’t immediately change anything from a student loan perspective.  However, it is a critical indicator of where student loan interest rates are likely to go in the future.

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