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How Do Rising Interest Rates Impact Your Student Loan Repayment?

Key Takeaways

  • Student loan interest rates continue to increase in 2018.
  • People with variable-rate student loans could see their monthly payments go up.
  • Converting a variable-rate loan into a fixed-rate loan will ensure your payments won’t change in the future.

The federal funds rate and London Interbank Offered Rate (LIBOR) continue to rise.

What does this mean for you? Student loan rates continue to rise in 2018. Generally speaking, when the federal funds rate increases, so do interest rates on new federal loans. When the LIBOR rises, the same happens for private loans. However, these changes only affect new loans and existing loans with variable interest rates.

Graduates, take note

Rising interest rates are obviously a big deal for students who are still taking out loans for school. But what about graduates who are paying off their student loans? Will anything change?

Well, it depends. If your loan has a fixed interest rate, you won’t experience a change.

However, if you have a variable-rate loan, you’ll likely see your interest rate go up. Any interest rate increase will result in less of your monthly payment being applied to the principal. That means paying more in interest over the life of the loan.

Can refinancing your student loans help?

Again, it depends. First, look at the interest rate and repayment terms of your existing loan(s) to see if it’s worth looking into refinancing. Second, check your credit score.

That’s because private lenders base your interest rates on your credit history, in addition to other factors that determine your ability to repay. That means if your credit is in good standing, you could qualify for a rate that’s better than your original loans, regardless of whether you currently have a fixed or variable rate. Or, if your credit isn’t great, you could consider adding a co-signer, which may help your chances of being approved for a lower rate.

However, if your loan(s) has a variable rate, it’s especially important to look into refinancing. Changing to a fixed-rate refinance loan could be ideal since you’ll be protected against future rate changes.

With a lower interest rate, you could either reduce your monthly payment or continue to make the same payment, but have the extra money go towards the principal. This second option would pay off your loans quicker. What’s not to like about that?

Refinancing could also combine multiple loans into one, giving you one easy-to-track student loan payment to make each month.

However, there are still a couple of scenarios when refinancing doesn’t make sense, even if you qualify for a better interest rate:

  1. Federal student loans offer income-based repayment options that provide repayment flexibility. For instance, if you took a lower-paying job right out of college, income-based repayment adjusts your monthly payment amount based on your current income so you’re not overwhelmed with large payments. Then your monthly payments will go up as you earn more money. Refinancing those loans with a private lender could result in forfeiting this benefit.
  2. Are you going into public service? If so, you could have your loans forgiven after working, for instance, as a teacher, doctor, or lawyer. However, loan forgiveness is only an option for federal loans, not private. Therefore, if you’re going into one of the qualifying public-service fields, make sure you consider this factor before deciding to refinance.

What to remember

Just remember to check your credit before applying and weigh the pros and cons of federal and private loans to make sure refinancing makes sense for you.

More information

We are committed to helping you reach your potential. To learn more about how refinancing your student loans could help you reach your saving goals, check out our refinance calculator, call 1-877-405-2262 to speak with one of our Student Lending Specialists, or visit your nearest Citizens Bank branch.

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