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Interest rates are on the rise, and that means student loan borrowers could be in for a tough time. As rates go up, so does the cost of borrowing money. For students and recent graduates who rely on student loans to pay for school or cover other expenses, that could mean more debt and higher monthly payments. The recent interest rate hikes announced by the Federal Reserve may have different implications for student loan borrowers, depending on their loan type.
So, what should borrowers be on the lookout for?
For federal student loans, the interest rate is fixed for the life of the loan. For example, as rates rise, borrowers that currently have federal student loans with a 4% interest rate will see no change in their interest rate or minimum monthly payment. However, for borrowers in the process of taking out a new federal student loan, interest rates will be determined by the 10-year Treasury note yield on the date their loan is first disbursed. This means that if rates go up to 6%, for example, when the loan is taken out, the interest rate will also be 6% for the lifetime of the loan.
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For some private student loans, the loan interest rate is variable and will fluctuate along with market interest rates. In the case of variable interest rate student loans, if the loan was disbursed at a 6% interest rate and the federal interest rate goes up to 8%, the interest rate on that loan will increase to 8%.
So, what does this mean for student loan borrowers?
The short answer is that it depends on the type of borrower. Private student loan borrowers with variable interest rate loans will likely see an increase in their monthly payments as the government adjusts rates. It should be noted that although rates on variable interest rate loans typically rise in tandem with the market, it is ultimately up to the lender to decide how much to raise their rates. Some lenders may keep their rates the same, while others may raise them. Student loan borrowers with private student loans should contact their lender and stay up-to-date on these developments.
Federal student loan borrowers with current student loans, on the other hand, may not see a change in their interest rates as these loans typically have fixed rates.
To effectively navigate these changes, it may be the right time for private student loan borrowers to consider student loan refinancing. By refinancing student loans to a lower interest rate, borrowers can potentially lower their monthly payments and/or save money on interest over the lifetime of their loan. Borrowers with a variable rate could also consider refinancing to a fixed rate. In addition, student loan refinancing could provide borrowers with the flexibility to choose a new repayment term that works better for them.
With rates expected to continue to rise, now may be a good time for borrowers to consider repayment options and shop around for the best deals.
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