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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