Inflation has caused some major changes to the US economy. For student loan borrowers, this is a significant development.
We don’t know how long inflation will be an issue or how long high interest rates will last across the economy.
However, what we do know for sure is that inflation impacts student loan borrowers.
What is inflation?
Inflation is a general rise in price levels in an economy over a period of time.
In most cases, small steady inflation is normal. Most experts say that some inflation is a good thing and a sign of a growing economy.
As consumers, we see the prices of goods and services increase. However, historically, inflation also meant increases in wages.
If there is inflation, it means that a dollar today buys more than a dollar will in the future.
So what does this have to do with student loans?
Inflation is Good for Many Borrowers
Suppose you are repaying your federal loans on the 10-year repayment plan. Each month you pay $324 towards your debt.
If there is steady inflation, those $324 payments will seem more affordable with each passing year. As noted earlier, inflation typically means salary increases, so that same $324 payment will be a smaller portion of your salary.
The borrowers hurt by inflation are the ones with variable interest rates.
The Student Loan Borrowers Hurt by Inflation
Variable-rate loans have interest rates that can go up or down.
During times of higher inflation, borrowers should expect variable-rate loan interest rates to increase.
When borrowers see a larger than expected monthly bill, the culprit is often a variable-rate student loan with a recent rate adjustment.
The borrowers hit hardest will be the ones who do not experience wage growth during inflation, but they do see increased monthly payments.
How do I know if my loan is a fixed or variable rate? Federal student loans are fixed-rate loans. Congress adjusts the interest rates on new loans each year, but once the borrower receives the loan, the rate does not change.
Private student loans should indicate if the interest rate is fixed or variable on the monthly statements. If the answer isn’t obvious from your statement, a quick call to your lender should remove any doubt.
Preventing Inflation Issues
The borrowers most vulnerable to inflation are the ones with variable-rate private student loans.
While some of these loans have interest rate caps, the maximum possible interest rate is often in the 9-10% range.
One area where inflation hasn’t moved things too much is on longer loans. Borrowers can still get low interest rates on a 20-year fixed-rate loan.
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