High inflation is bad news if you have student loans. Here’s why
This story is part ofCNET’s coverage of how to make smart money in an uncertain economy.
Student loan forgiveness comes first for most borrowers. But if you’re not eligible for President Biden’s youngestor if you have balance left in January, inflation can make your student loans even more expensive.
Despite a slight slowdown in July, prices continued to rise and fall loans, there’s one more reason to worry.. And if you have student
In general, a period of high inflation like the one we’re experiencing now makes it harder for borrowers to repay existing debt and can push interest rates on personal student loans further higher.
At the pause in federal student loan paymentsif inflation is still high, borrowers may have a harder time resuming monthly student loan payments.
Here’s everything you need to know about how inflation affects your student loan debt.
Inflation and Student Loans
The Federal Reserve has hiked the federal funds rate four times to curb rampant inflation. But while prices haven’t fallen from record highs, these increases in the Federal Funds Rate have indirectly led to even more onerous interest rates on consumer items like credit cards, mortgages and loans.
The Fed’s rate hikes won’t affect fixed-rate student loans you currently hold, such as B. Federal Loans. But personal loans with variable interest rates (interest rates that can rise and fall with the economy) can raise their interest rates, making it more expensive for borrowers to repay.
If your wages increased at the same rate or higher along with inflation, it could make paying off your debt a little easier and counteract higher interest rates. “Inflation dictates that a dollar 10 years ago is worth more than it is today. So as long as your wages go up with inflation, the debt you owed on a loan you took out in the past will be worth less today,” said Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid.
However, wage increases are average Not keep up with inflation. Through June, wages have risen just 5.1% over the trailing 12 months, making it harder for borrowers to pay down their debt on top of covering day-to-day expenses.
Here’s a breakdown of how inflation might affect you depending on your credit type and whether you’re still in school or not:
If you have federal student loans:
Federal student loans are always fixed-rate loans, so the interest rate stays the same throughout the life of the loan.
If you have a government student loan, inflation could work in your favor as it effectively invalidates your debt, but that only helps if your wages match or exceed inflation.
If, like most Americans, your wages haven’t increased significantly andthan before, this voided guilt won’t help you – and you might even find it when the federal government’s repayment freeze ends.
If you have private student loans:
Personal student loans can be either variable or fixed rate, and payments on either type of personal loan have not been suspended during the pandemic.
For those with fixed-rate personal loans, the interest rate on your existing student debt will not increase. However, with inflation making everyday purchases more expensive, you may have less overall cash to set aside to pay off debt.
If you have adjustable rate loans, your interest rates could definitely go up – and may have already. When inflation rates rise, interest rates usually follow. Adjustable rate personal loan holders could expect even higher interest rates in the future.
If you are a new borrower this year:
Both federal and private student loan rates will be higher for the 2022-23 academic year, Kantrowitz said. The new federal student loan rates for the 2022-23 school year are as follows:
- Student loans: 4.99%
- Direct unsubsidized graduate loans: 6.54%
- PLUS loan: 7.54%
That’s a big leap up for the students. For reference, a federal student loan last year had an interest rate of 3.73% — about 1.25% lower than the interest rate for the upcoming academic year.
Interest rates on private student loans have also risen. Fixed-rate personal student loans range from 3.22% to 13.95% and variable-rate personal student loans range from 1.29% to 12.99%, according to Bankrate, which is owned by the same parent company as CNET.
Will inflation make loan repayments harder after federal payments freeze ends?
For many, paying off student loan debt is a real problem during times of high inflation. According to the Student Debt Crisis Center, out of 23,532 borrowers, 92% of full-time workers are worried about making payments as inflation skyrockets.
“Personally, I haven’t been able to save to pay off student loans, and I don’t think I could have accounted for the growing gap between wages and the national cost of living,” said Jonathan Casson, a recent graduate student at Cornell University.
While Biden’s forgiveness of $10,000 to $20,000 in federal loans will help some borrowers completely eliminate or significantly reduce their debt, others with higher debt levels may struggle to make monthly payments. If you’re worried about paying off your student debt after the break is over, here are a few steps to keep in mind:
1. Look at income-based repayment plans
The government offers four income-based repayment plans that can help make monthly payments more affordable for borrowers who need to keep payment amounts small. Currently, each IDR plan limits payments to between 10% and 20% of your discretionary income (income after paying taxes and needs) and forgives your loan balance after 20 or 25 years of payment. However, under Biden’s newly proposed IDR plan, payments would be just 5% of your discretionary income, which could lower your monthly expenses.
For example, if you currently receive an IDR and your monthly discretionary income is $1,500, you can pay up to $225 per month (20%). However, under the new IDR, this could be reduced to $75 per month, saving you $150 per month or $1,800 per year.
2. Check if you are eligible for additional loan forgiveness
Whether or not you qualify for the recently announced federal student loan forgiveness, there are other forgiveness programs to consider.
If you are a teacher, first responder, civil servant, or government employee, you may be eligible for federal student loan forgiveness under the. You must be in a qualifying position, have eligible federal student loans, and have made 120 qualifying payments to receive waiver (each paused month during the federal freeze counts as one qualifying payment).
The PSLF has temporarily expanded its benefits to include forgiveness for more federal loan types and IDR plans, and may now make eligible some applicants who have been denied loan foreclosures in the past. The extended application for forgiveness waiver is due by October 31, so it’s important you find out now if you’re eligible. In some cases, you may need to consolidate your loans into federal direct loans, a process that can take 45 days.
While your monthly payment may not change if you’re still under the 120 payment deadline, you’re at least one step closer to student loan forgiveness.
3. Refinance personal loans
As many interest rates continue to rise this year,Investing in fixed-rate student loans sooner could help you save hundreds to thousands in interest — and may even reduce your monthly payment.
You should only refinance if you can get better payment terms or a lower interest rate. Otherwise, the effort is usually not worth it and could cost you more in interest.
4. Check your budget
If paying off a student loan isn’t possible with your current budget, see if there are ways to cut expenses or pay off high-interest debt now to free up funds. WhileAs daunting as it may seem, there are several resources and apps to help you calculate and identify expenses that you can reduce or eliminate.
5. Consider a side hustle
A part-time job outside of your main job can help supplement your income when inflation spikes. According to a 2022 Bankrate survey, 31% of adult Americans currently have part-time jobs. Having an extra source of cash can help fill a gap in your budget and give you some breathing room.