Changing interest rates is a huge source of frustration for many student loan borrowers. Often lenders change interest rates and it seems like you were given no warning. Making things worse is the fact that many may even continue to take money out of your bank account, even if it means taking more than usual.
Can my lender really just change my rate?
Unfortunately, they often are allowed to do so. Many borrowers sign up for variable interest rate student loans. These loans are typically tied to a measuring rate such as the 10-year bond or LIBOR (the measuring rate is used to approximate the cost of borrower). For example, your student loan interest rate could be defined as the 10-year bond plus 4%. As the rate goes up or down, your student loan interest rate goes up or down.
What rate your loan is tied to and how often it goes up or down is a function of the loan contract you signed when you originally borrowed the money. With variable rate loans, you lender does not need your permission to adjust your interest rate. They can do it as part of the deal you originally agreed upon.
Watch Out for Mistakes
If you have held student loans for a while, you probably have noticed that these loans can change lenders and servicers over the life of the loan. The lender can sell the debt to another company, or they can change the company in charge of collecting your debt. Either way, it means a headache for the borrower. New companies mean new websites, new addresses to mail checks, and new company policies to learn.
One of the biggest things to watch is for a company to raise interest rates when they did not have a right to do so. (This is an issue with any student loan, but you should be especially careful with loans that have gone from one company to the next). A lender could easily make a mistake about the terms of the original deal. A fixed rate loan could accidentally become variable, or the way your variable rate is calculated could be mistakenly altered.
Preventing or correcting this error is the responsibility of the borrower. As a borrower, you should know the following about all of your loans:
- Is it fixed or variable rate?
- If it is variable, what rate is your loan tied to?
- How often is the interest rate allowed to change?
- Are there any caps on your variable rate loan?
If a lender misreads a contract, or inputs data wrong, one of these terms could put into the system wrong. If you don’t want to pay extra, it is essential that you bring any errors to your lenders attention.
Often lenders do have the right to change the interest rate on your loan. However, a change in rate may be the result of a mistake on the part of the lender. Take the time to understand your loan terms so that you can keep an eye on the lender. If you don’t understand, ask your lender for a copy of the contract and force them to explain any questions you have. If you do not keep an eye on your lender; nobody will.