How Will Inflation Affect Student Loan Borrowers?June 20, 2022
If you’ve watched the news or skimmed news outlets’ headlines lately, you’ve likely heard a lot about inflation. In May, the U.S. Inflation rate reached a staggering 8.6%. Such a high rate means you’ll end up paying more for all goods and services, including cars, housing, gasoline, and even food.
Currently, federal student loan payments are set to resume on August 31, so you’ll have to start making payments on your loans after a lengthy break. Between payments resuming and inflation, many borrowers are worried. Here’s what you should know about rising inflation rates — and what you can do to manage your debt.
3 Ways Inflation Can Affect Student Loans
If you have outstanding student loans, inflation can be a major concern. Why is it such a big deal? It usually means interest rates are going to change.
The Fed is the nation’s monetary policy authority. One of its chief goals is to manage inflation. The Fed aims to keep inflation at 2%; when inflation rates exceed that number, the Fed takes steps to rein in inflation. Typically, those steps include raising the federal funds rate — the rate banks use to lend to each other. While the federal fund rate doesn’t set lender rates, lenders may use it to set their own rates
Inflation can seem like a very abstract concept, but it has a real and tangible impact on your everyday life. If you have student loans or will need to borrow money for college, here are three significant ways inflation could affect you:
1. Interest Rates on Existing Loans May Increase
If you have fixed-rate loans, such as federal loans or some private loans, your interest rate is set for the length of the loan. The only way to change it is to refinance your debt.
But if you have a variable-rate loan, your rate can change along with market conditions. Though the federal fund rate isn’t what lenders use to determine their rates, it’s an indicator of changing market conditions, and lenders will likely follow suit and raise their rates. With a variable-rate loan, you could see increases in your rate, and a higher rate can also affect your monthly loan payments.
2. Your Debt May Be Worth Less
Do borrowers benefit from inflation? In some cases, yes!
If you have fixed-rate loans, a high inflation rate means your debt is less expensive than it was when you took it out. For example, $30,000 of student loan debt could be the equivalent of just $23,500 after five years, assuming an average annual inflation rate of 5%. In that case, your debt could be more affordable.
However, that’s assuming your wages are keeping pace with inflation. If you haven’t gotten a raise — or if the raise hasn’t kept pace with rising inflation — you will have less money than you did before, and your debt will be more difficult to afford.
3. New Loans May Be More Expensive
If you are a college student or a parent borrowing on behalf of a student, be prepared for rising rates. The Department of Education just announced that the rates for all federal loans have increased for the 2022-2023 academic year. For undergraduate students, the rates increased by approximately 33% from last year.
|July 1, 2022 – June 30, 2023||July 1, 2021 – June 30, 2022||July 1, 2020 – June 30, 2021|
|Direct Subsidized or Unsubsidized Loans for Undergraduate Students||4.99%||3.73%||2.75%|
|Direct Unsubsidized for Graduate Student||6.54%||5.28%||4.30%|
|Parent or Grad PLUS||7.54%||6.28%||5.30%|
If you’re shopping for private student loans, you can expect rates to be higher than their historic lows, as well. Rates vary by lender, your credit, and the selected loan term.
[Tip: To get the lowest possible rates, add a cosigner to your private student loan application and opt for the shortest loan term you can afford.]
Managing Your Debt During Riding Inflation
To deal with student loans and inflation, use these tips:
1. Cut Back Your Spending
With rising inflation, the key to paying off your loans is reducing your spending and trimming any unnecessary transactions.
If you’re already following a strict budget, there may not be many areas to consider. However, you may be able to save money through meal planning and batch cooking, getting a roommate, carpooling, and canceling subscriptions.
2. Explore Alternative Payment Plans
If your income hasn’t increased enough to keep up with inflation, contact your loan servicer to see if there are alternative payment plans available.
With federal loans, you may be eligible for income-driven repayment plans that base your payments on a percentage of your discretionary income.
If you have private student loans, some lenders offer forbearance programs that allow you to temporarily halt your payments if you lost your job or have serious medical issues. With others, you may be able to arrange to make reduced or interest-only payments for a short period of time.
3. Refinance Your Debt
Now is a great time to refinance your student loans before rates increase. If you opt for a fixed-rate loan, you can lock in a lower rate for the duration of your loan— a great benefit when there may be upcoming rate changes.
Keep in mind that refinancing federal loans will transfer them to a private lender, and you’ll no longer qualify for federal loan benefits like federal deferments or loan forgiveness.
With ELFI you can view rates and potential loan options — without impacting your credit — with the find my rate tool.*