Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
For people with variable-rate student loans, or any kind of debt, it can pay to watch inflation.
Inflation has been a growing concern for the past year, even as interest rates have remained low. COVID-19 relief measures worth trillions served as a lifeline for many and helped drive major stock indices to record highs. The broader economy began to recover from the pandemic.
But production snags and widespread shortages are driving prices higher for many items, stoking the risk of rampant inflation. Some economists warned that the government largesse also could spark inflation that would outpace wage gains.
When the economy “runs hot,” the Federal Reserve typically raises interest rates to cool down the economy and maintain stability.
When might a cooldown begin? As of now, the St. Louis Fed president has forecast an initial rate increase in 2022.
What Exactly Is Inflation?
Inflation—the rising cost of everyday items—is an important economic factor to everyone 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.
Put simply, inflation means that the price of bread will be higher tomorrow than it is today. So lenders tend to increase interest rates when they lend money, given that borrowers will be paying the money back when those dollars will buy less. That’s one reason inflation and many interest rates have typically risen or fallen in step with each other.
The Federal Reserve is another reason. The country’s central bank plays a major role in managing the economy, especially with factors like interest rates and inflation. It recently raised its projections for inflation this year. And, to keep a lid on inflation, it recently moved forward the date when it will likely raise the interest rates at which it lends money to banks.
What Does Inflation Mean for Student Loans?
To someone with student loan debt, inflation can be good news . Inflation drives up the price of everything, including wages. As a result, some borrowers are paying back certain fixed-rate loans, for example, with dollars that have less value than the ones they borrowed.
There are exceptions. If a borrower took out a variable rate private student loan, it’s likely that inflation will lead to higher interest rates, which will translate into higher interest rates that the borrower has to pay. But if the borrower has a fixed-rate private student loan and her salary keeps up with the pace of inflation, then inflation can be helpful.
So, with the specter of inflation looming over the economy, it’s worth checking to see if your private student loan has a fixed or variable rate.
As a quick primer, fixed-rate loans have the same interest rate from when borrowers take out the loan to when they pay it off. Variable-rate loans change the interest they charge, which is influenced by Federal Reserve rate changes.
Variable-rate loans, also sometimes called “floating rate” loans, usually start out with lower interest rates than fixed-rate loans.
All federal student loans have a fixed rate; the rate for new loans is determined annually. The only variable-rate student loans are those offered by banks and other private lenders, though they also usually offer fixed-rate loans.
When Does Refinancing Make Sense?
Even with inflation on the horizon, interest rates have been at historic lows for more than a year. That has borrowers of all stripes refinancing their debts. That may mean getting a lower interest rate on their home mortgage, or bundling their credit card debt and paying it off with a single, lower-interest personal loan.
People with student loans may also be able to refinance their debt at a lower rate and change the length of the loan.
The first step is to check the interest rates on your existing student loans against the rates offered by other lenders. If they offer a better rate, then it may be possible to pay off that student loan debt faster or reduce your monthly payments.
Some lenders refinance both federal and private student loans. If you choose to refinance federal student loans with a private lender, realize that you will give up federal benefits and protections like income-driven repayment plans and loan forgiveness options.
Timing is everything. If the Fed acts sooner than expected to prevent the economy from overheating, rates could climb. Especially if you have private student loans with variable rates, student loan refinancing could save you significant money and help you pay off your loans faster. (To reiterate, fixed-rate federal student loans are not affected by Fed rate changes.)
A student loan refinancing calculator could come in handy as you weigh your options.
The Fed expects to raise interest rates sooner than anticipated as inflation fears rise. What does that mean for private student loan holders? They may want to refinance some or all of their loans while rates remain low.
SoFi refinances federal student loans, parent PLUS loans, and private student loans with no origination or prepayment fees.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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