Inflation, the rising cost of everyday items, has been on everyone’s mind lately, from investors to policy makers to borrowers. The reason this matters to borrowers is that inflation can result in higher interest rates on all types of debt, including student loans.
So how can inflation impact student loans and should you be concerned?
If you’re like most professionals, you may have graduated with over $ 100,000 in student loans. Unlike credit card debt that was used to buy things you couldn’t use for a long time, student loans funded your education and training, which is the foundation of your career. But with rising inflation, there are growing concerns that student loan rates and payments will also increase.
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How inflation actually helps student loan borrowers
The good news is, if you have a fixed rate, inflation could actually help. Inflation drives up the price of everything, including wages. This means that some borrowers pay off certain fixed rate loans with dollars that are less valuable than the ones they borrowed and your monthly payment does not increase.
So if the borrower has a fixed rate student loan and has a salary that keeps pace with inflation, then inflation can help.
But inflation can hit some private loans hard
While inflation can be good for those with a fixed rate, the same is not true if you have a variable interest rate loan, such as a private variable rate student loan.
The rates that borrowers pay for variable rate loans are usually indexed to prevailing market interest rates. Market interest rates tend to rise whenever lenders see inflation on the horizon. In times of higher inflation, borrowers should expect interest rates on variable rate loans to increase. If borrowers see a higher monthly bill than expected, it’s likely an adjustable rate student loan with a rate adjustment.
So, with rising inflation expected to continue through 2022, it’s worth checking whether your student loan has a fixed or a variable rate. According to Ernest Burley, a certified financial planner, “With inflation on the rise, you don’t want to be in a variable interest rate loan. It’s a great idea to lock in a low fixed interest rate on your student loan (or any other loan).
More in our series on inflation:
Steps You Can Take To Avoid Inflation Pains
Refinancing: Experts agree that the first thing to do is swap any floating rate debt for a fixed rate, if possible. So if you have an adjustable rate private student loan, it may be a good idea to start looking for refinancing now before the rates go up.
Pay off your debt: If you have credit card debt, maybe now is the time to start paying it off to make sure your monthly payments don’t eat up a growing chunk of your paycheck, especially if you’re working. where wages don’t go up as fast.
If you invest, own stocks: you want to make sure that your savings keep pace with rising prices. When you own bonds, you’re essentially in the same position as other lenders – facing the possibility of being paid back with dollars that are less valuable than what you loaned. Inflation can cause short-term disruption in the stock market, but in the long term, corporate profits should keep pace with rising prices.
This is definitely the time to “be wise, careful and strategic”. Burley said.
Resources: From Federal Office for Student Aid, find out more about: