As we’ve all heard, the federal government has decided to once again raise interest rates. The economy is booming, and when that happens, the fed gets eager. Several times they’ve raised the interest rate in 2018. They’ll raise it a few more times in 2019, much to the detriment of people with student loans
Increasing interest rates makes things more expensive. If you have student debt, you’ll end up paying more money towards your total. High interest is what makes all forms of debt harder to pay off. More increases in 2019 could cause substantial problems for those with student loans. First, you have to understand the two types of student loans.
Student loans come with two different types of interest. The first is a fixed rate. This rate is locked in from the moment you get your student loans approved. This rate will not move, regardless of how the fed works their numbers. The sad part is, most students have a variable interest rate.
A variable interest rate means you’ll be paying different amounts throughout the life of your student loans. In most cases, the interest rate you pay is tied to the Fed’s decision. These interest rates are adjusted at least once per year, but like 2018, can be changed multiple times. This can make keeping up with your student loans a difficult task.
Fixed Rate Student Loans
While it may seem like getting fixed-rate student loans is the answer, it may not be. The government anticipates these changes ahead of time. While you receive a fixed rate that won’t change, they know how to game the system. Federal loans have their interest rates set by Congress.
They determine where to fix the interest rate by the 10-year Treasury yield. That means the new interest rate could get a major push upward. If you plan on returning to school or taking out student loans in the future, even the fixed interest rate will be high. This will often incorporate any increases made to the variable interest rate.
Advice for Student Loan Borrowers
People who borrow money in the form of student loans are hit with a higher interest rate. That’s because when they apply for the loan, they are younger, have little (or no) work history, and no credit history. In most cases, these people would be denied a bank loan. But, because federal loans are guaranteed.
The best way to combat this is to stick with the system. Don’t default, don’t skip payments, and keep working towards your goals. Over time, you will build credit and job history. Your credit score will go up, which would allow you to refinance your student loans. That means you can get a loan with much less interest to pay off the student loans.
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This new loan would have a much lower fixed interest rate. This means you’ll save thousands of dollars over the length of your repayment term. In order to qualify for this type of loan, you will need to have decent credit. You’ll also have to prove a consistent income over that time. So, the best thing to do is to keep fighting.
