Kameleon007 / iStock.com
The impact of Federal Reserve interest rate increases on student loans falls firmly into the “it depends” category, primarily having to do with who made the loan and when they got it.
See: 4 of the best student loan refinance companies
Find out: 10 ways to pay off your student loans in a year
Your loan payment may increase when the Federal Reserve raises interest rates this year. But for many student loan borrowers, especially those with federal student loans, the higher rates won’t have any impact.
That’s because federal student loans issued over the last 15 1/2 years have fixed interest rates. No matter how high general interest rates are, most federal student loans will always have the same rate for the entire term of the loan. This has been the case since July 1, 2006, Forbes reported. Now, if you took out a federal student loan before then, you may have a variable interest rate. In this case, the interest rate on the loan will rise along with general interest rates.
Most federal student loan borrowers won’t have to worry about that for the next few months. In December 2021, the US Department of Education extended emergency COVID-19 relief for student loans through May 1, 2022, according to the studentaid.gov website. The emergency relief includes the following measures for eligible loans:
- Suspension of loan payments.
- 0% interest rate.
- Suspended collections of delinquent loans.
For new federal student loans, interest rates reset every July 1. If the Federal Reserve raises rates before then, which seems likely, the interest rate on new federal student loans could also rise. To view different interest rates, sorted by year, on federal student loans, visit StudentAid.gov and navigate to the year-by-year interest rates page.
For those with private student loans, it’s a different story. If you have a fixed interest rate for the life of the loan, then don’t worry: any move by the Fed will have no impact. But if you have a variable interest rate, be prepared for your student loan rate (and your monthly payment) to go up when the Federal Reserve raises rates.
Learn: If your student loans were forgiven, here’s what to do next
Explore: How Generation Z plans to avoid student loans
Variable-rate student loan rates are generally pegged to one of two benchmarks: the London Interbank Offered Rate (LIBOR) and the prime rate, according to Credible.com. The prime rate and LIBOR closely track the fed funds rate, so any move by the Federal Reserve to raise short-term rates will likely mean increases in rates on variable-rate student loans.
If you have a variable-rate student loan, or even a fixed-rate loan with a high interest rate, you might consider refinancing now to lock in the current Fed rate before it goes any higher.
More GOBankingRates Content