What does the Fed rate hike mean for your student loans?

0

After the first interest rate hike since 2018, investors may have many questions. In particular, what this rise in interest rates means for individuals is of utmost importance to many investors. Specifically, many may wonder what the Fed’s rate hike means for student loans.

Source: Shutterstock.com

Rising interest rates impact all loans, but not in the way many investors might think. The Federal Reserve raised the benchmark rate from levels near zero for the first time since the start of the pandemic. However, this overnight lending rate has no real impact other than the short-term rates used to determine what banks pay each other for very short-term investments such as commercial paper or treasury bills.

For student loans, like mortgages, it’s the longer-term bonds that really matter.

Let’s dive into what investors should consider right now when it comes to student loan debt.

How the Fed’s rate hike affects student loans

It’s probably important to start with the fact that most people with existing student loans won’t be affected by the Fed’s rate hike decision we saw on Wednesday. This is because federal student loans carry a fixed interest rate, which is set at the time of borrowing. The rate for any new federal loans (after July 1) is tied to the 10-year US Treasury yield, which changes from time to time.

For those who have already blocked their student loans, there is really nothing that will change. However, for those looking to borrow more to finance their education or who will soon be undertaking post-secondary education, higher bond yields have an impact on student loan rates. Additionally, some private student debt (in addition to federal loans) may have variable interest rates. For those with a variable rate, payments are likely to increase.

Indeed, since the beginning of March, bonds across the yield curve have been rising. The yield on the 10-year US Treasury fell from 1.72% to 2.2% in less than three weeks.

This is largely due to expectations that interest rates will stay higher for longer, due to inflation and a more hawkish Fed. Generally speaking, bonds with longer maturities tend to have higher yields than bonds with shorter maturities. So when the short end of the curve rises due to Fed rate hikes, longer-dated bonds tend to follow.

Various experts suggest that the new rate on student loans could be between 4% and 4.5%. This is up from rates of around 3.7% currently.

More expensive borrowing has led to a widespread expectation that President Joe Biden’s administration may choose to further extend the deferral period for student loans. This expectation has impacted companies in the student loan industry, such as SoFi (NASDAQ:SOFI) for some time. Therefore, investors should consider a number of factors in addition to their own personal student loan rates.

As of the date of publication, Chris MacDonald had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Chris MacDonald’s love of investing has led him to pursue an MBA in finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative long-term investment outlook.

Share.

Comments are closed.