Personal Finance

What the Fed's likely rate hikes could mean for student loan borrowers

Key Points
  • Rising interest rates will impact both federal and private student loan borrowers.
  • Here's what you need to know about the changes.
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The borrowing costs for student loans could get more expensive soon.

With the economy recovering from the pandemic and inflation a growing concern, the Federal Reserve is looking at raising interest rates three times in 2022.

Those increases will impact both federal and private student loan borrowers. Here's what you need to know.

What does this mean for my federal student loans?

Interest rates on federal student loans reset once a year, on July 1. The percentage is tied to the 10-year Treasury note.

"The new interest rates applies only to new loans," said higher education expert Mark Kantrowitz.

That's because federal education loans are priced at a fixed-rate, meaning they don't change after you've borrowed them, regardless of the Federal Reserve's actions or the state of your finances.

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Because most of the Fed's rate hikes may occur after July, new federal student loan borrowers should see only a small jump on the interest rate next year, Kantrowitz said. He expects 2022's rate to be between 3.5% and 4.5%.

Expect that every $10,000 or so you borrow in federal student loans will come out to around $100 a month during repayment.

And my private student loans?

The Fed's interest rate hikes won't impact existing fixed-rate private student loans, Kantrowitz said.

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However, the charge on variable-rate loans and new fixed-rate loans will likely go up in response to the central bank's actions. Some of those increases could come soon since the interest rates on private student loans reset monthly.

Your lender is not required to inform you of the adjustment, Kantrowitz said, and so you'll want to keep close tabs on it yourself to know what you're paying.

Should I refinance?

It depends whether you're thinking about federal or private student loans.

Those with private student loans who were considering refinancing "should look into pulling the trigger sooner rather than later to try and take advantage of the current rates," said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit. 

In addition, those with a variable rate loan may want to switch to a fixed-rate loan, considering that multiple hikes are in store from the central bank, Kantrowitz said.

The Institute of Student Loan Advisors provides a list of lenders and their terms, including their interest rates and repayment options.

In regard to federal student loans, experts recommend more caution around refinancing.

Turning your government loan into a private loan will mean you lose a number of consumer protections.

For example, federal student loan borrowers may be able to pause their payments without interest accruing if they're struggling financially or unemployed. The government also offers payment plans that are capped at a percentage of your income, with some bills winding up at low as $0.

In addition, there are a number of forgiveness programs for federal borrowers.

Broad student loan cancellation is also still on the table, but your debt would no longer be eligible if you refinance.

"If loan forgiveness occurs, it will happen before the mid-term elections," Kantrowitz said. "So, borrowers might hold off on refinancing for a while."