There is a lot in the news lately about a possible Fed rate hike. Extremists talk about market turmoil, changes to lending and borrowing, and a new recession. But how much of that is really true, and how does it impact you and your current student loans?
To fully understand what a rate hike means to student loan borrowers, we first must look at what “The Fed” is, how it works, and how its decisions impact the economy.
Whether you are a long time borrower or expect your first student loans in the coming years, read on to learn how a Fed interest rate hike affects you.
What is “The Fed” and why can they choose rates?
When the media refers to The Fed, they are referring to the United States Federal Reserve System. The Federal Reserve System is made up of twelve banks, each assigned to its own region.
At the top of the Federal Reserve is a seven-member Board of Governors, nominated by the President of the United States and confirmed by Congress for a 14-year term. The leader of the Board of Governors is the Chair, currently Janet Yellen.
The United States Federal Reserve System works similarly to central banks in many other countries, with a goal of managing economic growth, inflation, and other economic factors through monetary policy.
The Federal Reserve can control the supply of money and sets important federal funds rate that makes headlines whenever it changes (or analysts think it may change in the near future).
What is the federal funds rate?
The federal funds rate is a key tool that the Federal Reserve can use to help control inflation and economic growth. If interest rates are high, Americans and businesses operating here are encouraged to save and invest. If rates are low, people are encouraged to borrow and spend.
Theoretically, this means that by lowering the interest rate, the Federal Reserve can spark economic growth, and by increasing rates, they can keep inflation from rising too quickly.
The federal funds rate does not directly affect student loans. It’s the rate that banks use to lend to each other overnight.
If Bank #1 needs a few billion dollars for interest payments tomorrow and Bank #2 has an extra few billion dollars in cash, they can lend the funds to Bank #1 and charge the rate set by the Fed for interest.
A Fed funds rate hike means that the interest rate banks charge each other will go up. While that doesn’t affect most other loans directly, there are some important ways it does impact existing loans.
How the Fed rate hike impacts existing loans
Fed interest rates impact what banks charge each other, and based on that, banks decide what to charge businesses and consumers who borrow. The current Fed funds target rate ranges from 0.25% and 0.5%, but you would be hard pressed to find a loan in that range as a consumer.
Banks lend to each other, and then to businesses and consumers. They want to earn a profit when they lend, so they add a margin based on the risk and desired profitability from lending.
By the time you borrow as a consumer, there is a bit of padding added in between you and the Fed funds rate. Only the most creditworthy borrowers can get rates near the Fed funds rate. Those borrowers are the federal government and a few rare, stable companies.
For existing private and federal student loans with a fixed interest rate, interest rates will not budge. That is the big benefit of fixed-rate loans — if interest rates rise, your rate is locked. Most lenders that offer both fixed-rate and variable-rate loans charge a slightly higher interest rate on fixed-rate loans for this reason.
For variable-rate student loans, you can expect to see a change. Some variable rate loans have a defined interest rate at the Fed funds rate plus a margin. In those cases, as soon as the Fed changes its rates, borrowers can expect their rates to increase by the same amount.
For many loans, however, the Fed funds rate isn’t the most important signifier. Some banks use LIBOR, the London Interbank Offered Rate, to determine interest rates. Others still use various economic indicators and factors to determine their rate.
If your variable-rate loan interest rate does increase, it will do so gradually. If you are unsure how your loan works, check out your loan paperwork or call your servicer for more information.
How the Fed rate hike impacts new loans
Fed interest rates will most likely have an impact on future loans, but the impact is still to be determined. Both private lenders and the federal government have to look at economic conditions as a whole before they set rates in the future.
Private banks typically choose rates based on LIBOR. Congress is responsible for setting rates on federal student loans. Odds are, if there is a Fed interest rate hike, other loans’ rates will increase as well — but only time will tell for sure.
What can you do now?
For now, fixed-rate student loan borrowers are best off doing nothing. The same does not apply to variable-rate student loan borrowers, who may be able to refinance at a lower fixed rate and secure a low interest rate.
Student loan borrowers should expect a letter or a noted increase on your next statement if your interest rate will change. Otherwise, just keep on doing what you’re doing and try to get out of debt as soon as you can.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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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 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|