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How Fed Rate Changes Affect Your Student Loans


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Federal Reserve rate changes may affect your interest rates. 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 increase with a Fed rate hike and decrease with a Fed rate cut. If your student loan interest rates are fixed, your rates are fixed forever, regardless of what the Fed does.

  • If you are considering taking out or refinancing student loans. As above, the new student loan rates (fixed or variable) will likely be higher or lower depending on the Fed rate. If the Fed cuts its rate, it may also signal a good time to refinance student loansbecause you may be able to lock in a lower rate over the long term.

The Fed and student loan interest rates

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

Private lenders do not base their variable interest rates on student loans directly on the federal funds rate; they are often based on the London Interbank Offered Rate, or LIBOR. Federal loan rates are based on 10-year treasury bills.

But here’s the problem: Fed funds rate, LIBOR, and Treasury bill yields are a lot like BFFs. So when one goes down, the others usually go down. And when you go 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 the potential change in your student loan interest rate.

If you don’t want to, or if you want to take advantage of a high pricing 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 or new lender, ideally at a lower interest rate. To qualify, you will generally need a credit score of at least 600% and a stable income. When rates fall, consider switching from floating rate has a fixed rate to realize potential savings in the long term.

  • If you have federal student loans: The government stopped issuing new federal variable rate loans in 2006, so you would only have a variable rate if you borrowed before that date. In these cases, 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 a student loan

If you are considering refinancing your private student loans, now may be the time to do it.

If you are considering refinancing your student loans, now may be the time to do so.

Keep in mind, however, that refinancing federal student loans is risky. You will lose all the bells and whistles that come with them, including access to income-based repayment plans and forgiveness programs. Refinancing can be a good option if you don’t plan to take advantage of these benefits.

If you already have private student loansrefinancing them when you can get a better rate can be a no-brainer. Before refinancing a student loan, find the lowest interest rate for which you are eligible.

Estimate Your Student Loan Refinance Savings

Key terms of this story

Fixed interest: An interest rate that does not change during the term of a loan. All federal student loans have fixed interest rates, but private loans can offer either fixed or variable interest rates. Fixed interest is the safest option because you don’t have to worry about increasing your rate and payment.

Refinancing: The process of exchanging your current student loans for a new private loan with more favorable terms, such as a lower interest rate. Refinancing can help you save money on your loan and may be suitable for people with stable finances.

A student loan is money you borrow from the federal government or a private lender to help pay for tuition, such as tuition, supplies, books, and living expenses. Federal student loans generally have lower interest rates and more flexible repayment options than private loans. Borrowers should exhaust student loans the federal government before applying to private lenders.

Variable interest: Variable interest rates can change monthly or quarterly depending on the loan agreement and have maximum rates of up to 25%. Variable interest loans are riskier than fixed interest loans, but can save you money if the time is right.