Inflation, the rising cost of everyday items, has been on everyone’s minds lately from investors to policymakers to borrowers. The reason it matters to borrowers is that inflation can lead to higher interest rates on every kind of debt, including student loans.
So how can inflation impact student loans and should you be worried?
If you are like most professionals, you may have graduated with over $100,000 in student loans. Unlike credit card debt which was used to buy stuff you may not use for long, student loans financed your education and training that is the foundation for your career. But with rising inflation, there is growing concern that student loan rates and payments could increase as well.
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How Inflation Actually Helps Student Loan BorrowersThe good news is that if you have a locked-in rate, inflation could actually be helpful. Inflation drives up the price of everything, including wages. This means some borrowers will be paying back certain fixed-rate loans with dollars that have less value than the ones they borrowed and your monthly payment does not increase.
So if the borrower has a fixed-rate student loan and has a salary that keeps up with the pace of inflation, then inflation can be helpful.
But Inflation Can Hit Some Private Loans HardWhile inflation can be good for those with a locked-in rate, the same can’t be said if you have a loan with a floating interest rate, such as a variable-rate private student loan.
Rates borrowers pay for floating-rate loans are typically pegged to prevailing market interest rates. Market interest rates tend to rise whenever lenders see inflation on the horizon. During times of higher inflation, borrowers should expect variable-rate loan interest rates to increase. If borrowers see a larger than expected monthly bill, it’s probably a variable-rate student loan with a rate adjustment.
So, with rising inflation predicted to carry over into 2022, it’s worth checking to see if your student loan has a fixed or variable rate. According to Ernest Burley, a certified financial planner, “With inflation on the rise, you do not want to be in a variable interest rate loan. It is a great idea to lock-in a low fixed interest rate on your student loan (or any loan).”
More in our inflation series:
How to Inflation-Proof Your Retirement Portfolio
How Rising Inflation Rates Can Affect Your MortgageHow Inflation Affects Your InvestmentsSteps You Can Take to Avoid Inflation PainRefinance: Experts agree that the first thing you should do is swap any floating rate debt for a fixed rate, if possible. So, if you have a private student loan with a variable rate, it may be a good idea to start looking into refinancing now before rates go up.
Pay down debt: If you have credit card debt, now may be a good time to start paying it off to ensure your monthly payments don’t eat up a growing chunk of your paycheck, especially if you happen to be in a line of work where salaries don’t climb as fast.
If you invest, 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 — facing the possibility of getting paid back with dollars that are less valuable than the ones you loaned out. Inflation can cause short-term disruptions in the stock market, but in the long-term, corporate profits should keep up with rising prices.
Now is definitely a time to “be wise, be cautious and be strategic.” Burley said.
Resources: From the Federal Student Aid office, find out more about:
Restarting payments after Covid-19 payment pauseStudent loan calculatorStudent loan consolidation