Trump’s election has already had some significant effects in financial markets worldwide. Major players are adjusting their investment strategies, changing their bet on how to make money in a Trump-led USA. It’s likely this will mean a rise in interest rates including rates for private student loans.
The reason behind the likely interest rate hike is tied to U.S. Treasury notes and their long-term yield. Interest rates are sensitive to many different factors, but there is a direct correlation between interest rates, the federal reserve, and U.S. Treasury notes. While fixed rate loans are not affected by subsequent market changes, private loans with variable rates will be. If you’re not sure how federal interest rates and private student loans work together, then allow me to elaborate.
In the weeks since the November election, the yields on long-term U.S. Treasury notes have surged to a high point for the last 12 months. Likely, this indicates that investors think that the U.S. government will be borrowing a lot more money in the coming four years. Due to the perceived higher demand for funding, more people are interested in investing in Treasury notes.
The yields on Treasury notes are very closely tied to other forms of interest rates such as mortgage rates and, of course, student loans. In fact, federal student loans are directly tied to yields, so as one rises, the other rises as well. Private student loans are a little bit different because the terms of the loans are set by the lending institution, not by the federal government. The ripple effects of Treasury notes will eventually affect the Federal Reserve which influences private lenders as well. Borrowers of private student loans that have variable interest rates will probably see their rates rise as a consequence.
It’s important to understand the difference between federal and private student loans, and loans with fixed versus variable interest rates.
Federal student loans are given by the government. The Department of Education sets the terms of the loans, and borrowers are required to file financial aid information in order to qualify. Private student loans are given by private, non-federal financial institutions who set their own loan terms and require borrowers to have appropriate credit ratings.
All federal student loans are fixed-rate which means that the interest rate will not change for the life of the loan unless the borrower refinances for a lower rate. Since federal loan rates are fixed, the only variation in interest rates is on a year-to-year basis when the federal government resets the interest rate according to the market. Private student loans offer both fixed and variable interest rates. A variable interest rates varies from year-to-year during the life of a loan depending on the market. This is the key difference between fixed and variable interest rates.
For lenders with variable rates, it may be unavoidable to pay a higher interest rate at some point. However, even though private student loan interest rates are slated to rise, they are currently at a fairly low level. If you have a private student loan with a variable interest rate, you could apply to refinance your loans at a lower, and preferably fixed, interest rate. If you qualify, then you could lock your student loans into a lower interest rate that doesn’t change.
If you can’t refinance into a fixed rate loan, your lender may still be able to offer you better variable-rate terms. For example, refinancing a loan with 6 years left to a 10-year loan with lower monthly payments might help you float above the interest hike.
If you are currently in repayment on a fixed rate loan, you won’t have to worry about a surging interest rate. But the low rates being offered right now might make refinancing an attractive option, and it may be your last chance to catch a rate this low for a couple of years.
Private student loans interest rates will probably not raise as quickly as the federal loan interest rates. For students who are considering taking on new loans, this might make private loans a more attractive choice for funding. A short term, fixed rate private loan might make better financial sense than a federal student loan.