Federal Reserve rate hikes generally increase rates for credit cards and mortgages, but they’ll affect your existing student loans only if they have variable interest rates.
If your student loan interest 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 likely go up when the Fed raises rates. You likely have variable rates only 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 you 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 June 2018 projections show the federal funds rate creeping up through 2020. If it does actually continue to increase, your variable student loan rates will likely follow suit.
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 student 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 have a variable rate only if you borrowed before then.
- If you have private student loans: Refinance 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 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.
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.
Before refinancing student loans, shop around for the lowest interest rate you qualify for. In addition to rates, compare lenders’ repayment options, deferment and forbearance policies, and co-signer release programs.