What Rising Interest Rates Mean for Student Loan Borrowers

With retail interest rates set for another bump following the Federal Reserve’s expected half-point hike this week, student loans are coming into even sharper focus. The historic low interest rates of recent years may soon become a thing of the past. The question is: How soon?

Why the Federal Reserve May Be Kicking Up Its Rate Increases

To battle inflation, the Fed raised interest rates in March by 0.25%, the first rate increase since 2018. At the time, economists said the Fed could raise interest rates another six times, aiming for a rate of 1.9% by the end of the year.

It’s been described as the most aggressive pace in 15 years, but the Fed may be turning up the heat even more, increasing the next bump to 50 basis points. Fed Chair Jerome Powell said ahead of the May 3-4 meeting, that the half point hike would be on the table, as “it is appropriate to be moving a little more quickly” to fight inflation.

Powell added that investors who are anticipating a series of half-point increases were not over-reacting, indicating that by the end of the year, the Fed rate could be even higher than 1.9%.

Refinancing Student Loans Will Likely Get More Expensive

It’s this low-interest environment that has made student loan refinancing a money-saving move. When loan holders refinanced, they were often able to secure a lower interest rate than the rate on their federal loans. (For example, the federal student loan rate for undergraduate Direct Subsidized loans was 6.8% from July 2006 through June 2008, while refinancing rates were sub-3% as recently as last year.)

Rates are off their lows now, but still not as high as they were in 2006. But with the Fed raising its rates faster than indicated earlier this year, the window for refinancing student loans at a comparatively low rate may be closing a lot sooner than anticipated.

Recommended: Student Loan Refinancing Calculator

Timing Refinancing Your Student Loans

Of course, if you have federal student loans, you know that the current interest rate is 0% and is scheduled to stay that way through Aug. 31. No doubt, that’s a rate that can’t be beat.

However, if you are waiting for the payment pause to end before refinancing your federal student loans, you may find yourself looking at much higher interest rates by fall. Depending on what your current interest rate is and how much you have borrowed, you could see bigger savings by not waiting.

And if you are thinking of refinancing private student loans, you may not want to delay at all, since rates are unlikely to go lower right now.

That said, federal student loan borrowers should keep in mind that refinancing means you are replacing your federal loan with a private one, and as a result, you will no longer be eligible for federal repayment or forgiveness programs or other protections.

Recommended: Top 5 Tips for Refinancing Student Loans in 2022

The Takeaway

A series of expected increases from an inflation-fighting Federal Reserve means that the interest rates on student loan refinancing are rising – and possibly rising fast. Since getting the lowest possible interest rate is the goal for refinancing, it may not pay to delay any longer.

Not sure about refinancing now when your federal loan payments are on pause? If you refinance your federal loans with SoFi, you will get 0% interest through Aug. 15, and no payments until Oct. 1. What’s more, SoFi’s student loan refinancing rates are competitive — and there are no origination fees or pre-payment penalties.

Curious to know what rate you could get if you refinanced now?

View My Rate

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/martin-dm

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Nancy Bilyeau ABOUT Nancy Bilyeau Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for SoFi. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.

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