During 2018, the Federal Reserve increased interest rates multiple times, and additional increases are widely expected to occur during 2019. This could have substantial consequences for student loan borrowers.
Student Loans with Variable Rates
Interest rates for student loans come in two varieties.
A fixed interest rate is locked in at the get-go; the interest rate that you have when you take out the student loan will be the same interest rate throughout the loan’s repayment period.
However, many student loans – particularly private student loans, but also some older federal loans – have variable interest rates. This means that the interest rates may change over time. How and when these changes occur depends on the specific terms contained in the loan’s promissory note, but often the rates are tied (indirectly) to what the Federal Reserve is doing. Variable interest rate loans typically are adjusted at least once per year, and often more frequently.
Student Loans with Fixed Rates
While fixed rate student loans that have already been disbursed would not be impacted by interest rate changes elsewhere, new federal loan disbursements will be affected. That’s because federal student loan interest rates are set by Congress, and current law ties federal student loan interest rates to the rates of the 10-year Treasury yield, which are in turn impacted by what adjustments made by the Federal Reserve. So while current fixed-rate federal student loans aren’t changing, subsequent federal student loan disbursements could have higher fixed rates. This would impact student loan borrowers planning on returning to school and taking out new federal loans.
What Student Loan Borrowers Can Do
Private student loan borrowers with variable rates may want to consider refinancing those loans through a new private lender. This could allow borrowers to obtain a new loan that has a lower, fixed interest rate, which could potentially save thousands of dollars over the repayment term. Borrowers should make sure their new rate is fixed, and they should be wary of any origination fees (additional costs tacked on to the loan’s disbursement) which could eat into any associated savings. Borrowers should also be aware that the best student loan refinancing programs are typically only available to those with excellent credit (at least 680) and a consistently solid income (near or above six figures); if any one of those elements are lacking, or if the borrower is trying to refinance a particularly large student loan balance, a cosigner may be required.
Some older federal student loans have variable rates, as well. However, federal student loan borrowers should be cautious about refinancing federal loans via a private loan. That’s because federal student loans have several unique programmatic benefits and consumer protections which could be forever lost by refinancing via a private loan program. Once a federal loan is refinanced, it cannot be re-converted into a federal loan again in the future. Borrowers can also consider consolidating their variable-rate federal loans into a federal Direct consolidation loan. This keeps the loan within the federal system, and Direct consolidation loan interest rates are fixed at the weighted average of the loans that are being consolidated. But there could be downsides to consolidating as well, since consolidation results in a new loan and the borrower must restart at the beginning of a new repayment term.
As for fixed-rate federal loans, borrowers shouldn’t have to worry about future interest rate changes, since those types of loans would not be affected. But borrowers returning to school should keep a close eye on student loan interest rates over the coming year, particularly for those considering graduate school. Graduate school federal student loans (such as federal Grad PLUS loans) typically have higher interest rates than undergraduate federal loans, and there are no subsidies – meaning these loans will start accruing interest immediately, and will continue to accrue interest during the in-school deferment period.
