What the Fed rate hike means for student loans

Unless you have student loans with variable interest rates, you can rest easy. 

Mel Evans/AP/File
Students embrace as they arrive for the Rutgers graduation ceremonies in Piscataway, N.J.

The Federal Reserve raised interest rates on Wednesday. And while the hike will likely increase rates for credit cards and mortgages, it will only affect your student loans if they have variable interest rates.

If your rates are fixed, as most are, you can let out a student-loan-sized “phew.” Your rates are locked in forever, regardless of what the Fed does.

If your student loans have variable rates, those rates will probably go up. You likely only have variable rates if you have private student loans.

The federal funds rate — what people are really referring to when talking about a Fed rate hike — is the rate banks charge each other when they exchange money overnight. Variable student loan interest rates aren’t directly based on the federal funds rate; they’re often based on the London Interbank Offered Rate, or LIBOR.

But here’s the thing: LIBOR and the federal funds rate are BFFs. So when one goes down, the other usually goes down. And when one goes up — you get the idea.

If your student loans have variable rates …

You don’t have to do anything, as long as you’re comfortable with the possibility of your rate rising more in the future. The Fed’s September projections show the federal funds rate creeping up through 2019. If it does actually continue to increase, your variable rates will likely follow suit.

For now, the hike is small. The Fed upped the federal funds rate by a quarter of a percentage point. Such a minor increase won’t dramatically affect your student loan interest rate or monthly payment, says Jason Delisle, resident fellow at think tank American Enterprise Institute.

But if you’re regretting your decision to take a variable rate, you have an out: You can switch to a fixed rate by consolidating or refinancing. Here’s how.

  • If you have federal loans: Consolidate through a federal direct consolidation loan to get a fixed rate. The government stopped issuing new federal loans with variable rates in 2006, so you’d only have a variable rate if you borrowed before then.
  • If you have private loans: Refinance your student loans through a private lender to get a fixed — and potentially lower — interest rate. To qualify for refinancing, you typically need a credit score in the upper-600s or higher and a steady income.

When to refinance your student loans

If you’ve been planning to refinance your student loans, now may be the time to do it, before interest rates go up more.

“As rates go up, it becomes less attractive to refinance your student loans,” says Alexander Holt, education policy analyst at think tank New America. Interest rates in general, not just the federal funds rate, are on the rise, he says.

Keep in mind, though, that refinancing federal student loans is risky. You’ll lose all the bells and whistles that come with them, including access to income-driven repayment plans and forgiveness programs.

Curious about other ways the Fed’s rate hike will affect your money? We tackled seven common questions.

Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.

This article first appeared in NerdWallet

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