How Fed Rate Changes Affect Your Student Loans

Fed rate changes only affect your existing student loans if they have a variable interest rate.
student loan rate hike

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Federal Reserve rate changes can affect the interest rates on your existing student loans, as well as any loans you may take out in the near future.

  • If you already have student loans. If you have variable interest rate loans, their rates will likely go up with a Fed rate increase and decrease with a Fed rate cut. If your student loan interest rates are fixed, you rates are set forever — regardless of what the Fed does.

  • If you're planning to take out or refinance student loans. Similar to above, new student loan rates (fixed or variable) will likely be higher or lower based on the Fed rate. If the Fed lowers its rate, that can also signal a good time to refinance student loans, as you might be able to lock in a lower rate for the long term.

The Fed and student loan interest rates

The federal funds rate — commonly known as the Fed rate — is the rate banks charge each other when they exchange money overnight.

Private lenders don't base their variable student loan interest rates directly on the federal funds rate; they’re often based on the London Interbank Offered Rate, or LIBOR. Federal loan rates are based on 10-year Treasury notes.

But here’s the thing: The federal funds rate, LIBOR and Treasury note yields are kind of like BFFs. So when one goes down, the others usually go down. And when one goes up — you get the idea.

If you have variable rate loans

You don’t have to do anything when the Fed rate changes, as long as you’re comfortable with your student loan interest rate potentially changing as well.

If you don't want that — or want to take advantage of a strong rate environment — you can consolidate or refinance your loans. Here’s how.

  • If you have private student loans: You can refinance student loans with your existing lender or a new one, ideally at a lower interest rate. To qualify, you'll typically need a credit score in at least the upper-600s and steady income. When rates drop, consider switching from a variable rate to a fixed rate to snag potential long-term savings.

  • If you have federal student loans: The government stopped issuing new federal loans with variable rates in 2006, so you’d have a variable rate only if you borrowed before then. In these instances, you can consolidate through a federal direct consolidation loan to get a fixed rate. You can also refinance these loans with a private lender.

When to refinance student loans

If you’ve been planning to refinance your private student loans, now may be the time to do it.

If you’ve been planning to refinance your student loans, now may be the time to do it.

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. Refinancing may be a good option if you don’t plan to take advantage of those benefits.

If you already have private student loans, refinancing them when you can qualify for a better rate can be a no-brainer. Before refinancing any student loans, shop around for the lowest interest rate you qualify for.

Estimate your student loan refinancing savings

Key terms in this story

Fixed interest: An interest rate that does not change during the life of a loan. All federal student loans have fixed interest rates, but private loans can offer fixed or variable interest rates. Fixed interest is the safer option because you don’t have to worry about your rate — and payment — increasing.
Refinance: The process of swapping out your current student loans for a new private loan with more favorable terms, like a lower interest rate. Refinancing can help save you money on your loan and can be right for people with stable finances.
A student loan is money you borrow from the federal government or a private lender to help pay for college costs, like tuition, supplies, books and living expenses. Federal student loans typically have lower interest rates and more flexible repayment options than private loans. Borrowers should exhaust student loans from the federal government before applying with private lenders.
Variable interest: Variable interest rates can change monthly or quarterly depending on the loan contract and come with rates caps as high as 25%. Variable interest loans are riskier than fixed interest loans, but can save you money if the timing is right.

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