The Federal Reserve’s benchmark interest rate is on the rise. These rates already increased once in December, and experts are predicting another three rate increases for 2017.
This could mean more earnings on your savings, but it could also mean higher interest on your debt. While that’s hardly a welcome announcement for anyone paying down debt, it’s not all bad.
Federal Rates on the Rise
You might be wondering why, in a time of deep student loan debt, the Federal Reserve would consider raising its rate. According to Janet Yellen, the Fed’s chairwoman, the rate increase is “a vote of confidence in the economy.”
This is because the Fed decreases its benchmark rate during times of economic uncertainty. Since the Great Recession, rates have been historically low to give borrowers a chance to get out from underneath crushing debt. But as the economy improves, the rate needs to increase to prevent inflation.
In short, a higher federal benchmark interest rate means a strengthening economy. But what does it mean for your student loans? That answer will depend on the kind of student loans you have.
Fixed- vs. Variable-Rate Loans
First, it’s important to understand the differences between fixed and variable rates.
Fixed-rate student loans have interest rates that remain the same for the entire repayment period; they don’t change with the market. So let’s say you took out a 10-year student loan with a fixed rate of 6%. If the Fed raises rates today, your student loan interest rate will remain 6% until the loan is paid off. However, anyone who takes out a new loan after rates increase could end up with a higher rate than you.
If you have a private student loan, on the other hand, it could have a variable interest rate. Variable rates are tied to the market and can increase or decrease according to federal rate changes. How much and how often the rate changes is up to the particular lender.
If you’re wondering whether the rates on your student loans are fixed or variable, read your statements to find out. While you don’t have to worry about federal fixed-rate student loans, there’s no telling how much a variable-rate loan might increase. The Fed’s rate is a benchmark, but it’s entirely up to banks and lenders where to go from there.
How to Handle Rising Rates
If you have variable-rate student loans, it might be a good idea to do something now in case of potential increases. Here are a few things you can do to get ahead of the curve.
1. Look Into Refinancing
If you’re worried about any variable rates on your private student loans rising, refinancing can be a good strategy for lowering your rate as well as switching to a fixed-rate loan.
Currently, it’s only possible to refinance student loans through a private lender. That means refinancing federal student loans would result in some drawbacks, including the loss of federal loan protections such as forbearance, deferment and forgiveness.
In this case, however, there’s no need to refinance federal student loans; refinancing private variable-rate loans is what will protect you against future rate increases.
2. Strategize to Pay Your Loans Off Faster
If your rates are already as low as possible, an interest rate hike might be good motivation to get ahead of your debt.
Of course, you might not have the extra cash to pay off your loans faster. Instead try making bi-weekly payments: Split your monthly payment in half, and apply that amount to your loans every other week.
Why? This will result in making one extra payment per year without taking a huge chunk out of your budget. Just make sure your first two bi-weekly payments hit your account before the next month’s due date. You want to avoid accidentally paying less than the minimum.
3. Communicate With Your Servicer
If the interest rate on any of your student loans does increase and your monthly payment grows beyond what you can afford, contact your loan servicer immediately.
It can be a scary step to take, but it’s far more helpful than ignoring an impending issue. Missing payments on your student loans risks going into default, taking a big hit to your credit score — or even having your paychecks or tax refund garnished. Most lenders would rather work with you to come up with a payment plan, so find out what your options are right away. (Not sure where your credit stands? You can view two of your credit scores, with updates every two weeks, on Credit.com.)
Whatever You Do, Don’t Panic
Anyone with student loan debt can speak to the way it seems to affect every aspect of life. That’s why news of things like an interest rate hike can be so worrisome. But if you’re feeling nervous right now, don’t panic.
When the Fed raises rates, it does so incrementally. Though your lender doesn’t have to follow suit with an incremental increase, you probably won’t see a massive jump in your current rate. Until you know what your lender is going to do, stay calm and keep making those payments.
Use these tips to help you get out from under the rock of student loan debt. No matter what the Fed does to its benchmark interest rate, you’ve got this.