Monkeybusinessimages | iStock | Getty Images
The cost of borrowing for student loans could soon become more expensive.
As the economy recovers from the pandemic and inflation is a growing concern, the Federal Reserve is considering hike rates three times in 2022.
These increases will affect both government and private student loan borrowers. Here’s what you need to know.
What does this mean for my federal student loans?
The federal student loan interest rates reset once a year on July 1. The percentage is tied to the 10-year government bond.
“The new interest rates only apply to new loans,” said university expert Mark Kantrowitz.
That’s because federal educational loans are priced at a fixed rate, which means they won’t change after you take out, regardless of what the Federal Reserve is doing or your finances.
With most of the Fed’s rate hikes coming after July, new federal borrowers on student loans should see only a small spike in interest rates over the next year, Kantrowitz said. He expects an interest rate between 3.5% and 4.5% for 2022.
Expect every $ 10,000 you borrow in federal student loans to get by around $ 100 per month during the repayment.
And my private student loans?
Should I refinance?
It depends on whether you are thinking of government or private student loans.
Those with personal student loans considering refinancing “should try the trigger sooner rather than later to take advantage of the current interest rates,” said Betsy Mayotte, president of the Institute of Student Loan Advisors, a nonprofit.
Additionally, those on a floating-rate loan may want to switch to a fixed-rate loan, considering the central bank has several rate hikes, Kantrowitz said.
The Student Loan Advisor Institute provides a list of lenders and their terms, including their interest rates and repayment options.
In the case of federal student loans, experts advise more caution when refinancing.
When you convert your government loan to a private loan, you lose a number of consumer protections.
For example, federal student loan borrowers can suspend payments without accruing interest if they have financial problems or are unemployed. The government also offers payment plans capped at a percentage of your income, with some bills starting as low as $ 0.
In addition, there are a number of award programs for federal borrowers.
Extensive termination of the student loan is still on the table, but your debts would no longer be eligible for refinancing.
“If loans are granted, this will be done before the midterm elections,” said Kantrowitz. “So borrowers could hold back on refinancing for a while.”