Despite a slight slowdown in July, groceries you buy
to each month . But what is the impact of inflation on student borrowers?
The answer will vary depending on what type of loans you have – federal or private – and whether or not . Overall, however, inflation will make it more difficult for borrowers to pay off existing debt and will continue to drive up private student loan rates.
The current pause on federal student loan repayments. The moratorium has been extended six times since the start of the pandemic and has offered temporary relief to borrowers. Yet when repayments begin, high prices can make it harder for borrowers to restart monthly student loan repayments.
What exactly is the impact of inflation on the student loan debt you hold? We sat down with student loan expert Mark Kantrowitz, author of How to Appeal for More College Financial Aid, to discuss the specifics of what inflation means for student loan holders.
The role of inflation in student loans
The Federal Reserve raised the federal funds rate four times in an effort to slow runaway inflation. But while prices haven’t fallen from record highs, these hikes in the fed funds rate have indirectly led to heavier interest rates on consumer products, such as credit cards, mortgages and the loans.
Fed rate increases will not affect any fixed rate student loans you currently hold, such as federal loans. But private loans with adjustable rates (interest rates that can go up and down with the economy) can see their rates go up, making them more expensive for borrowers to repay.
If your wages were to rise in line with inflation at the same rate or more, that might make it a bit easier to pay down your debt and counter rising interest rates. “Inflation dictates that a dollar ten years ago is worth more than a dollar today. So as long as your wages increase with inflation, debt from a loan borrowed in the past will be worth less. today,” Kantrowitz said.
However, average wage increases are not keep up with inflation. In June, wages had risen only 5.1% over the past 12 months, making it harder for borrowers to reduce debt in addition to covering day-to-day expenses.
Here’s a breakdown of the impact inflation could have on you depending on your loan type and whether or not you’re still in school:
If you have federal student loans:
Federal student loans are always fixed rate loans, so the interest rate will remain the same throughout its lifespan.
If you have a federal student loan, inflation could work in your favor because it effectively devalues your debt, but that only helps if your salary has maintained or exceeded the rate of inflation.
If, like most Americans, your salaries haven’t gone up much andthan before, this devalued debt won’t help you – and you might even find it when the federal loan repayment freeze ends.
If you have private student loans:
Private student loans can be variable or fixed rate, and payments for either type of private loan have not been suspended during the pandemic.
For those with fixed rate private loans, the interest rate on your existing student debt will not increase. However, as inflation makes everyday shopping more expensive, you may end up with less money to put aside to pay off your debts.
If you have adjustable rate loans, your interest rates could certainly go up – and may have already. When inflation rates rise, interest rates generally follow. Holders of variable rate private loans could see even higher interest rates in the future.
If you are a new borrower in 2022:
Interest rates on federal and private student loans will be higher for the 2022-23 academic year, Kantrowitz said. The new federal student loan interest rates for the 2022-23 school year are as follows:
- Undergraduate loans: 4.99%
- Direct unsubsidized loans to graduates: 6.54%
- PLUS Loans: 7.54%
This is a big leap for students. For reference, last year a federal undergraduate student loan had an interest rate of 3.73%, about 1.25% lower than the rate for the upcoming academic year.
Private student loan rates have also increased. Fixed-rate private student loans range from 3.22% to 13.95% and variable-rate private student loans range from 1.29% to 12.99%, according to Bankrate, which is owned by the same parent company as CNET. .
Will inflation make it harder to repay loans after the federal payment break ends?
Kantrowitz said he expects the student loan repayment pause to be extended again, with renewed payments beginning after the 2022 midterms. Whether or not the student loan freeze is extended may depend on the White House’s decision. on. Either way, since the federal payment break is due to expire in a few weeks and no official announcement has been made, it’s best to prepare for the refund now.
For many, paying off student debt in times of high inflation is a real concern. According to the Student Debt Crisis Center, out of 23,532 borrowers, 92% of those working full time fear they will be able to pay in the face of soaring inflation.
“I personally couldn’t save to pay off a student loan, and I don’t think I could have accounted for the growing gap between wages and the national cost of living,” said Jonathan Casson, recently graduated from Cornell University.
If you’re worried about paying off your student debt, here are some tips for planning ahead:
How can you prepare to repay federal loans?
1. Look into income-driven repayment plans
The government offers four income-based repayment plans that can help make monthly payments more affordable for borrowers who need to reduce the size of payments. Each IDR plan caps payments at between 10% and 20% of your discretionary income (income after paying taxes and necessities) and cancels your loan balance after 20 or 25 years of payment. Eligibility for these plans depends on family size and discretionary income.
2. Check if you are eligible for loan forgiveness
If you are a teacher, first responder, civil servant or government employee, you may be eligible for federal student loan forgiveness under the. You must be in an eligible position, hold eligible federal student loans, and have made 120 eligible payments to receive the rebate (each month interrupted during the federal payment freeze counts as an eligible payment).
The PSLF has temporarily expanded its benefits to include forgiveness of more types of federal loans and IDR plans, and may make some applicants now eligible who have been denied loan forgiveness in the past. The expanded pardon waiver application is due by October 31, so it’s important to know if you’re eligible now. In some cases, you may need to consolidate your loans into Federal Direct Loans, a process that can take 45 days.
While your monthly payment won’t change if you haven’t yet reached the 120 payment goal, you’ll at least be one step closer to student loan forgiveness.
3. Refinance private loans
With many interest rate hikes expected this year,in fixed rate student loans could help you save hundreds or even thousands in interest – and could even lower your monthly payment. You should only refinance if you have better payment terms or a lower rate. Otherwise, it usually won’t be worth it and could cost you more in interest.
4. Review your budget
If paying off a student loan isn’t feasible with your current budget, see if there are ways to cut expenses or pay off high-interest debt now to free up funds. Whereasdaunting, there are plenty of resources and apps to help you calculate and identify expenses you can reduce or eliminate.
5. Consider secondary agitation
A part-time job outside of your main job can help supplement your income when inflation spikes. Currently, 31% of American adults have a side business, according to a 2022 Bankrate survey. Having an extra source of money can help fill a void in your budget and give you some respite.