You may have seen a whole lot of “The Fed” in news headlines lately. As the post-recession economy shifts, there’s constant chatter about rising interest rates and how they will affect consumers.
But really, how does the Fed and its decisions regarding interest rates affect you? We’re here to simplify what it all means.
What Is the Fed?
The Fed is short for The Federal Reserve, an independently operated entity overseen by Congress. At the heart of the Federal Reserve is the Board of Governors, which consists of seven people who are appointed by the President of the United States and confirmed by the Senate.
The Board, along with support staff, economists, and more write policies that keep banks and the economy in stable condition.
According to the Federal Reserve website, “[The Fed] was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.”
The Fed acts as the central bank of the United States and ensures financial systems are in order to protect the economy and consumers. One important thing the Fed does through the Federal Open Market Committee is manage interest rates.
During periods of economic struggle, such as the Great Recession of 2008, the Fed can lower interest rates in an effort to revive the struggling economy. In fact, the Fed lowered rates to near zero, which resulted in historically low rates for consumers across all financial products.
As of December 2015, after years of anticipation, the Fed finally raised interest rates. “After seven years of the most accommodative monetary policy in U.S. history, the Fed on Wednesday, as widely expected, approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent to 0.25 percent to 0.5 percent,” reported CNBC.
How a Fed Rate Hike Affects Student Loans
A Fed rate hike has an impact on just about every facet of the U.S. economy — but how does it affect student loan interest rates?
First, the good news: if you have federal student loans and have graduated in the past few years while interest rates were still low, your rates are fixed. Fixed interest rates can be a blessing or a curse (7.90% Grad PLUS loans anyone?) but they won’t change, regardless of whether there’s a Fed rate hike or not.
But if you have student loans that originated before 2006, that’s a different story. According to Edvisors, interest rates on Federal Stafford Loans were variable prior to 2006-2007, depending on whether the borrower was in school, within the grace period, or in repayment.
So If you took out student loans before 2006, you were issued student loans with variable interest rates and your rates may go up slightly because of a hike.
Private Student Loans Could Be Affected
Though a Fed rate hike won’t affect current student loan borrowers with federal loans, unfortunately, that’s not the case for most private student loan borrowers.
If you have private student loans, first find out if you have variable or fixed interest rates. If you have fixed interest rates, they will stay the same. If you have variable interest rates, a Fed rate hike will likely result in an increase over time.
Are Your Refinanced Loans at Risk?
If you have recently refinanced your loans through a student loan refinancing company and have chosen a variable rate, you may see an increase in your interest rates. When you refinance your loans, you typically get approved for a much lower rate than you previously had, so you could still come out with some serious savings.
What Should You Do?
A Fed rate hike is not something that can be controlled, but there’s no reason to panic. The Fed will typically raise rates incrementally, and with the most recent Fed rate hike in December 2015, rates increased only a small amount.
When a Fed rate hike occurs, you can expect variable interest rates to rise in the future, but it won’t happen overnight and it will likely mimic the increase of the Fed rate hike. Federal student loan borrowers with loans taken out after 2006 have fixed interest rates that will be unaffected.
If you have variable interest rates on your private student loans, you may consider refinancing and opting for fixed interest rates to hedge against future increases. However, you may save money with the variable rate, which is typically lower, if you can pay off your student loans in a couple of years.
A Fed rate hike affects consumers in a variety of ways — it can increase interest rates for credit cards, car loans, and mortgages. But it also mean savers will start earning more on their deposits.
When it comes to student loan interest rates, many borrowers won’t really feel the increase. Only private student loan borrowers or those who have refinanced to a variable rate loan may see an impact from rising interest rates, but it’s likely to be very small.
So don’t panic and keep rocking your student loan payments so you can ditch debt for good.
Photo credit: www.Futureatlas.com
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|2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/29/2019. Variable interest rates may increase after consummation.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Discover.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
* Offer valid for new Custom Choice Loans for which applications are submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019. A 0.50% interest rate reduction will be included in the loan options presented to an applicant during the online application process, upon passing the initial credit review. The interest rate reduction will be applied as of the first disbursement date and will be effective for the life of the loan.
6 Important Disclosures for LendKey.
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.99% – 11.98%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 11.99%4||Undergraduate and Graduate|
|3.27% – 10.80%5||Undergraduate and Graduate|
|4.46% – 9.43%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|3.99% – 11.64%8||Undergraduate, Graduate, and Parents|