In June, the Federal Reserve decided to raise the target for its benchmark Fed Funds Rate to between 1 and 1.25 percent. This was the second time the Fed raised rates in 2017.
On July 1, 2017, federal interest rates for student loans will jump, too. Find out how these increased interest rates will affect student loan borrowers and your wallet.
Student loan interest rates are rising
In May, the government announced that it would raise interest rates on student loans. Student loan rates are set by Congress and lawmakers decided that current conditions warrant higher rates for student debt.
New student loan interest rates, starting July 1, 2017, will rise from 3.86% to 4.45% on Direct Subsidized and Unsubsidized Loans for undergraduates. For graduate students, rates will increase from 5.41% to 6%.
Federal student loans have lifetime fixed interest rates, depending on when they are disbursed. When you consolidate federal student loans, the rate you pay is based on the average of your student loan rates.
Private student loans will also be affected by this interest rate hike. If you have variable student loans, you could end up paying more each month. One option is to refinance your private student loans in order to lock in a fixed rate so you can avoid the consequences of coming rate hikes.
What does a higher Fed rate mean for your wallet?
“No matter where you live, higher interest rates have an impact on your finances,” said Tom Drake, a financial analyst and the founder of Canadian Finance Blog.
“When you have debt, higher rates mean you pay more,” Drake continued. “On the other hand, if you are a saver, you could benefit from an interest rate hike as banks pay more.”
According to Drake, now is the time for Americans to pay down their debt — or at least try to find ways to lock in their current interest rates.“The Fed has
“The Fed has signaled that it is willing to take things slow, but the end to the low-interest-rate environment Americans have seen is coming to an end,” he said.
If you have variable rates on your home mortgage or credit card debt, you could see those rates heading higher in coming months. That means an increase in your monthly payments. If you can’t refinance your mortgage to a fixed rate, or if you can’t pay down your high-interest credit card debt, it might be a good time to look for things to cut back on.
“A higher interest rate is going to impact your monthly cash flow and reduce the amount of money you have available in your budget if you have debt,” said Drake. “You need to account for that in your spending. Either trim the fat or look for ways to earn more money.”
When will we see another Fed rate hike?
Fed Chair Janet Yellen cited the low unemployment rate as one of the reasons that most of the voting members of the Federal Open Market Committee (FOMC) at the Fed felt comfortable voting for the interest rate increase. This increase brought the Fed Funds rate up from the previous target of between 0.75 percent and 1 percent.
Yellen said that the timing and size of future changes to the Fed Funds Rate would be based on economic conditions that could impact employment and inflation. The FOMC sets monetary policy in an attempt to maintain maximum employment while targeting 2 percent inflation.
“The stance of monetary remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation,” said a press release from the Federal Reserve.
Basically, this means that members of the FOMC believe that interest rates are still low enough that even this rate hike won’t slow down economic growth. This comes at a time, however, when the Fed has adjusted its own projections:
The core PCE projection for 2017 has dropped to between 1.6 and 1.7 percent from the previous expectation of between 1.8 and 1.9 percent. However, the Fed expects the employment situation to improve. The previous forecast for the unemployment rate for 2017 was 4.5 to 5.6 percent. Now it’s at 4.2 to 4.3 percent.
Due to the mixed results of the projections, it’s likely that the Federal Reserve will approach its next moves cautiously. The recent Fed rate hike was widely expected, according to CNBC.
Fed rate hike and the end of cheap money
For the last several years, it’s been relatively cheap to borrow money. However, if the economy keeps making headway, the Federal Reserve is likely to keep increasing rates. Between June 29, 2006, and December 11, 2007, the Fed reduced rates from 5.25 percent to 4.25 percent.
It wasn’t until after the financial crash in 2008 that the FOMC dropped rates to a target range of 0 percent to 0.25 percent. Rates remained low until December 2015. That’s a long time for consumers to get used to historically low rates.
Now, though, it’s time to prepare your finances for the end of a low-rate environment that encourages borrowing. Your future self will thank you.
Susan Shain contributed to the reporting for this article.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|