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

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to What the Fed rate hike means for student loans
Read this article in
QR Code to Subscription page
Start your subscription today