If you have private student loans with a variable interest rate, an announcement from the Federal Reserve may mean that you will be paying a higher interest rate on your debt in the near future. New borrowers might also expect to see higher rates than the ones that are available now.
In December 2016, the Federal Reserve raised its benchmark interest rate by .25 percent, and forecasted three additional rate increases in 2017. While the initial increase was relatively low, the potential for more increases over the coming months and years means that interest rates on certain student loans have the potential to rise significantly.
When it comes to private student loans, there are two primary types: fixed interest rate and variable interest rate. Borrowers with existing fixed interest rates will not be impacted by these increases, but new borrowers may find that they will have higher interest rates for loans if the Fed raises its rate further. This includes all recent federal student loan borrowers.
For borrowers with variable interest rate student loans, these interest rate hikes could mean that the cost of their student loans could increase. Student loan interest rates are generally tied to either one of two standards — the prime rate or the London Interbank Offered Rate, known as LIBOR. These two rates are typically very close to the rate set by the Federal Reserve, so a rate increase by the Fed will often mean rate increases for variable interest rate private student loans as well.
Given the potential for higher interest rates in 2017 and beyond, borrowers who have variable interest rate student loans may want to consider consolidating or refinancing their private student loans into a fixed rate loan. To qualify for a consolidation at a lower interest rate, you will probably need to have a solid credit score of at least in the upper 600’s, and a steady income. If you have considered refinancing your student loans, you may want to do so now before rates continue to increase over 2017. However, keep in mind that the Federal Reserve is generally cautious about rate increases, so borrowers should not panic about the potential for a sharp spike in their interest rate.
Right now, a .25 percent raise in the interest rate will not significantly impact your monthly payment or overall interest rate. But if the interest rate continues to rise, as it is projected to do, then it may have an impact on the amount that you have to repay over the life of your loan. It may be a good idea to pull out the terms and conditions of your private student loans to see if there is a cap on the interest rate for your variable rate student loan.
A Federal Reserve interest rate increase is just one factor that may have an impact on the interest rates for student loans in 2017. The market may also affect student loan rates for new borrowers in 2017 and in years to come, along with political changes to how student loans are offered. Be sure to review your student loan documentation regularly to stay on top of your loans so you can make the best possible choice for repaying your loans.