Let’s start with the good news: According to experts, the national economy is picking up steam. Unemployment is down, and consumers are back in the borrowing game, according to a May 2017 report from the Federal Reserve Bank of New York.
Now for the bad news: To keep up with this economic upturn, the Federal Reserve is likely to hike interest rates one or two more times this year. The Fed already increased interest rates by 0.25 points in March, and another jump just occurred this June.
If you have variable interest rates on your student loans, you could see your rates go up over the next few months. Fortunately, savvy student loan borrowers can protect themselves against rising interest rates through refinancing.
Expect More Interest Rate Hikes This Year
The Federal Reserve is an independent entity that sits at the heart of the U.S. economy. It monitors and promotes the stability of the U.S. financial system.
One way the Fed maintains a stable economy is by managing interest rates. When the economy is struggling, as it was during the 2008 recession, the Fed lowers interest rates to encourage consumer borrowing.
In fact, the Fed kept rates steady for seven years, only increasing them for the first time in December 2015. Now that the economy has improved, the Fed plans to return to regular interest rate hikes throughout the year.
John Williams, president of the Federal Reserve Bank of San Francisco, told Bloomberg News, “My view still is that three rate hikes this year makes sense.”
Variable Rates On Student Loans Likely To Rise
Loans with fixed interest rates will not be affected by a rate hike. But if you have variable interest rates on your student loans, you’ll likely see them rise over the year. Private student loans often have variable rates, as well as most federal student loans disbursed prior to July 1, 2006.
While an increase of one-quarter of a percentage point may not seem like much, it can add up if you have a large loan balance.
Let’s say you have $50,000 in student loans at a 5.50% interest rate. Over 10 years, you’ll pay a total of $15,116 in interest. Increase that interest rate to 5.75% and you’ll pay nearly $750 more in interest. Make it 6.00%, and you’re paying nearly $1,500 extra in interest, compared to the 5.50% rate.
Even a small bump in interest can cost you a good deal of money, and economists predict multiple interest rate hikes in the near future.
Want to see how much interest rate hikes could cost you? Use a student loan calculator to estimate what you’ll pay on interest.
How To Switch To A Fixed Interest Rate
If you’re worried about rising interest rates, you may benefit from switching to a fixed interest rate. Borrowers can do this by refinancing student loans with a new lender.
When you refinance, you choose a new interest rate and repayment term for one or more of your loans. You might cherry pick individual loans to refinance or you could consolidate multiple loans into one.
Refinancing multiple loans has the added perk of simplifying repayment. Instead of dealing with different lenders and due dates, you’ll make just one payment to a single lender. This new lender might be a bank or an online lender.
If you have a steady income and a strong credit score, you could qualify for competitive interest rates. If you want to lower your monthly student loan bills, you could extend your repayment period. However, extending your loan term could mean you’ll pay more in interest over time.
Either way, refinancing lets you choose a fixed interest rate on your new student loan. By shedding your variable rates, you’ll protect yourself against future rate hikes.
Consider Refinancing Your Student Loans To Protect Your Wallet
Refinancing lets you switch from a variable to a fixed interest rate on one or all of your student loans. By locking in a fixed rate, you won’t have to worry about the Fed rate hikes. Whatever happens, your fixed interest rates will stay the same.
It’s easy to check your rates with a quick preliminary application. You can browse offers in under a minute with no impact on your credit score. If you find one you like, you could have a refinanced student loan with a fixed interest rate in a matter of weeks.
Before you apply, however, note that there are downsides to refinancing for some borrowers. For instance, refinancing federal loans means you lose access to federal protections, including programs such as income-driven repayment and Public Service Loan Forgiveness.
Before refinancing, make sure you’re ready to switch to a private lender who may not offer the same options as the federal government. If you’re confident you can repay the loan, refinancing could be a strategic, money-saving move in the face of the upcoming interest rate hikes.
The views of the author of this article do not necessarily represent the views of Gradifi.