How inflation could affect your student loans
Inflation, the rising cost of everyday goods, has been on everyone’s lips lately, from investors to policymakers to borrowers. The reason it is important for borrowers is that inflation can lead to higher interest rates on any type of debt, including student loans.
How can inflation affect student loans and should you be concerned?
If you’re like most professionals, you may have earned over $ 100,000 in student loans. Unlike credit card loans, which were used to buy things you may not be using for long, student loans funded your education and training, which is the foundation of your career. However, as inflation rises, there is growing concern that student loan rates and payments may also rise.
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Read more: US inflation climbs to nearly 6.8% of its 40-year high in November
How Inflation Actually Helps Student Loan Borrowers
The good news is that inflation could actually help when you have a fixed rate. Inflation drives up the price of everything, including wages. This means that some borrowers will repay certain fixed rate loans with dollars that are less in value than the ones they borrowed and your monthly payment will not increase.
So if the borrower has a fixed student loan and a salary that keeps pace with inflation, inflation can help.
But inflation can hit some personal loans hard
While inflation can be good for those with a fixed rate, it cannot be said when you have a loan with a floating rate, such as a home loan. B. a private variable rate student loan.
The interest rates borrowers pay for floating rate loans are usually linked to the prevailing market interest rates. Market rates tend to rise whenever lenders see inflation on the horizon. In times of higher inflation, borrowers should expect floating rates to rise. If borrowers see a higher monthly bill than expected, it is likely a variable student loan with an adjusted interest rate.
Given the likely rise in inflation through 2022, it is worth checking whether your student loan has a fixed or a variable interest rate. Ernest Burley, Certified Financial Planner, says, âWhen inflation rises, you don’t want to take out a floating rate loan. It is a good idea to have a low interest rate on your student loan (or any other loan). “
More in our inflation series:
Steps You Can Take To Avoid Inflation Pain
Refinancing: Experts agree that you should first swap all floating rate debt for a fixed rate if possible. So, if you have a personal floating rate student loan, it may be a good idea to look into your refinance now, before interest rates go up.
Reduce Debt: If you have credit card debt, now may be a good time to start paying off to make sure your monthly payments aren’t eating up a growing chunk of your paycheck, especially if you happen to be at work where salaries aren’t rising anytime soon .
When you invest, you own stocks: you want to make sure your savings keep pace with rising prices. When you own bonds, you are essentially in the same position as other lenders – and faced with the possibility of being repaid in dollars worth less than what you borrowed. Inflation can disrupt the stock market in the short term, but over the long term corporate earnings should keep pace with rising prices.
Now is definitely a time to “be wise, be careful, and be strategic”. said Burley.
Resources: Find out more from the Federal Office for Student Aid about: