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.
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