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If you borrowed money to attend college, you probably have some debt associated with that loan. While Federal lawmakers debate the possibility of canceling student loan debt, your payments may be on hold.
However, at some point, you may be faced with repaying those loans, regardless of what Congress and the courts decide. You need to know how your type of loan will be impacted if and when that happens.
How Do Rising Interest Rates Affect Your Student Loans?
If you’ve been paying attention to the economy, you’ve heard that the Federal Reserve has raised interest rates by several percentage points repeatedly over the past several months to combat ongoing high inflation rates. The Fed rate determines how much various loans will cost to finance. For example, the higher the Fed rate, the more that ultimately will cost you to borrow money for home and car purchases and what interest rates your credit card issuer will charge you.
Student loan borrowers may be impacted by higher interest rates as well, depending on the type of loan you have.
There are three types of student loans.
Federal student loan interest rates are always originated at a fixed rate. The interest rate you locked in when the loan originated is the interest rate you’ll pay for the life of that repayment term. These new rates are approved by Congress based on 10-year Treasury note auctions and set on July 1 each year for loans disbursed from July 1 to June 30 of the following year. There could be a rate increase for a new school year in the fall, but the interest rate is the same for all borrowers regardless of credit score or financial profile for direct subsidized and direct unsubsidized loans.
Private lenders who issue loans also originate many at a fixed rate which means those loan costs will not change either. Private student loan lenders use the benchmark London Interbank Offered Rate (LIBOR) on top of an average market rate. Your interest is also determined by your credit score based on your credit risk assessment.
The third type of loan is a private lender loan generated with a variable interest rate. If you have one of these types of loans, the amount you will pay in interest charges will be impacted when Fed rates move up or down.
Federal Reserve actions won’t affect your loan if you already have a fixed-rate student loan. But if you take out a new loan, you will be subject to current market rates and conditions.
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Should I Refinance My Student Loans?
If you have federal student loans, an interest rate hike won’t impact your loan payment or the interest you pay because there are no rate changes. When interest rates are rising, staying with the terms in your current loans is probably best.
For those who have private student loans with a fixed interest rate, it’s also a good idea to stay with the terms of your present loans. The only exception is if you think you can lock in a better rate, check with your lender to see if you can get a better deal.
If you have a private student loan with a variable interest rate, you can see your monthly payment and interest charges change based on market conditions. You can shop around to ensure you get the best variable-rate loans available based on your credit score and other factors.
You also have the option of refinancing into a fixed-rate loan if you think your variable rate will continue to rise.
Some borrowers also decide to refinance if they have several loans with different interest rates to save money and simplify their tracking and monthly payments.
If you’re taking out a refinanced loan with a private lender, your credit score and credit history will determine your new interest rate. If you don’t have an excellent or even good credit score, your interest rate will be higher than someone with a better score. Most lenders look for scores over 650, though scores on the lower end are often approved at higher rates.
If you want to refinance a Federal student loan, understand that these types of loans have several protections, such as deferment, forbearance, and income-driven repayment plans. Those benefits go away when you refinance. If you have private student loans, you won’t lose those types of benefits through refinancing since they are not offered in the first place.
Some lenders have a minimum balance you’ll need to refinance to meet their requirements. This can be as high as $10,000, so it’s best to ask and look for lenders that meet your qualifications.
Also, some lenders require that borrowers have a degree to be eligible for refinancing. Others require that your current loans are in good standing, that you haven’t defaulted on your loans or declared bankruptcy, and that you have a steady income.
How to Refinance Your Student Loans
Here are the steps you should follow if you’re considering refinancing your student loans.
Check your credit. Since this is the most significant factor lenders use to determine your loan suitability, you need to know your credit score as an indicator of what to expect. Get copies of your credit report from Equifax, TransUnion, and Experian and review them to ensure the information is accurate. If you find inaccurate information on a credit report, the Fair Credit Reporting Act (FCRA) gives you the right to dispute those items. The FCRA lets you claim free reports from all three credit bureaus at AnnualCreditReport.com.
Shop for the best rate. Check with multiple lenders to find the best rates. Many lenders have a prequalification tool that will give you a detailed idea of what you can expect for a student loan payment if approved vs. the terms you have now.
Choose a loan offer. If you shop and get prequalified for several loan offers, you’ll be in good shape when it comes time to make a final decision about the best student loan rate. You may have flexibility on the loan length to better meet your current needs. A shorter loan term could result in a lower interest rate and help you pay off your debt faster but with a higher monthly payment. A longer-term loan of more than five years will lower your monthly payment and make managing your budget easier, but it will cost you more over the life of the loan.
Complete the loan application. Be prepared to provide all the details of your current financial status. Gathering documents in advance helps speed up this process. If you’re applying with a co-signer, you’ll also need to provide their information. When you submit your application, the lender will run a hard credit inquiry to access your full credit report.Approval. If you’re approved, which could take a few days up to a few weeks, you’ll sign your loan documents and start paying on your new loan. Most companies now handle this process online. Since there is sometimes a delay until your old loans are paid off, keep making payments until you’re notified that the switchover is complete.