Interest rates are going up. In December 2016, the Federal Reserve announced their decision to raise interest rates by .25%. Not only that, but the Fed also indicated that they intend to raise rates three times in 2017.
For most student loan borrowers, this will not make a huge impact on your payments. However, it’s critical to review your loans for any privately-issued student loans that have variable interest rates. In a rising interest rate environment, variable interest rates translate into owing more on your loans.
Make a plan to address this gap on your own, or schedule a free consultation here. It’s your call. But if you have variable rate loans, the time to revisit your student loan payment plan is now.
Generally, Rising Interest Rates are Good
The Fed’s decision to raise rates, broadly speaking, is a good thing. The Federal Reserve raises interest rates when the economy is gaining strength. Rates have been held at historically extreme lows ever since the recession in 2008-2009. Increasing them is a great sign that unemployment is low, jobs and wages are expected to grow, and that we are finally getting back on course following an unusually slow recovery from the recession.
While the Fed raises interest rates when the economy is good, the flip side is also true. They cut interest rates when the economy is shrinking to encourage consumer spending. We should be cheering rising interest rates now to allow for this to happen later. When the economy does inevitably turn south again sometime in the future, the Fed needs to be able to cut interest rates to help spur growth.
Quite frankly, the Fed kept rates so historically low for the better part of the past decade that many experts were concerned about the possibility that if another recession were to strike soon, the Fed wouldn’t be able to cut rates any lower. Raising the rates now, while the economy is growing, will protect us in the future.
And finally, higher interest rates will (eventually) mean higher interest rates in your savings accounts. While it’s true that the first rates to go up will be on loans and mortgages, eventually the bump in interest rates will carry over to your savings. If you’re sick of earning next to nothing in your bank accounts, there’s some good news ahead in the coming months!
…But Not for New Borrowers or People with Variable Rate Loans
Of course, just because something is good for the economy as a whole, doesn’t mean it will necessarily benefit you. And rising rates are a great example of that.
For starters, people who take out new mortgages or student loans will have higher rates in 2017 than if they had borrowed in 2016, assuming the Fed proceeds as advertised. New loans are issued in accordace with the new interest rates. So, borrowing the same amount of money will cost more this year than it would have if you borrowed last year.
But more importantly for this article, borrowers who have variable rate student loans will be impacted as well. When I say “variable rate” loans, I am referring to student loans that have their interest rates tied to the current market rate. As in, a loan whose interest rate will fluctuate over time depending on decisions made by the Fed.
Most student loans, and all loans backed by the federal government, are fixed-rate loans. For these loans, the decision by the Fed will have no impact. (Although, as previously stated, a new federal student loan borrowed in 2017 will have a higher rate than one borrowed in 2016, all else equal).
But certain privately-backed student loans are issued with variable interest rates. And if you have these loans, you will be paying more in interest as a result of the Fed’s decision.
There’s no rhyme or reason as to whether your private student loans are fixed or variable rate. You need to grab a copy of your statement, or Master Promissory Note, and check. I’m here to help with this step, if you need it. But you absolutely have to check to determine whether you are impacted.
What to Do If You Have a Variable Rate Loan
Ultimately, there’s no one-size-fits-all solution here. But there are certain options you have to address this scenario, the most common of which is to refinance the loans.
Through refinancing, you are in essence exchanging your current loan for a new one. You still owe the same amount left on the loan, but the issuer who lends you the new loan will subject you to different terms than your previous lender. This can include a different loan term and repayment options, but the key one here is that your loan will have a new interest rate.
This new rate largely depends on your credit score. Has your credit score improved since you originally took out your student loans? Then great news, you can (probably) qualify for a better interest rate. What’s more, you could qualify for a fixed interest rate, rather than a variable rate.
Which means, through refinancing your loans into a new, fixed rate loan, you’ll no longer be subjected to the rising interest rates that the Federal Reserve has indicated are coming in 2017.
Of course, things change. If economic conditions change later this year, the Fed could decide to hold off on the raise. But all signs at the moment point to multiple interest rate increases this year. If you have variable rate loans, the time to review your plan is now.
If you want more information on whether this might make sense for you, let’s schedule a free consultation.
This is critical. Be very careful in evaluating your options before deciding to refinance your loans.
For the most part, refinancing privately-issued student loans won’t do you major harm. But keep your overall goals when it comes to your loans (are you trying to pay them off as quickly as possible, or minimize your monthly payments?) before you decide to refinance. Review the new terms for the refinanced loan carefully before you accept the offer.
But most importantly, think two, three, four, five times before refinancing any federal student loans that you have! While you may be able to get lower interest rates on private loans if you have a great credit score, keep in mind that refinanced federal loans in most cases will lose all the flexible benefits associated with them. For example, refinanced student loans aren’t eligible for Public Sector Loan Forgiveness or for the various income repayment plans that are available for federal loans.
In short, it can be a big mistake for certain borrowers to refinance. Student loans are much more complicated than they appear at first glance. If you want a second opinion, reach out and let’s talk.