Inflation, the rising cost of everyday items, has been on everyone’s minds lately from investors to policymakers to borrowers. The reason it matters to borrowers is that inflation can lead to higher interest rates on every kind of debt, including student loans.
So how can inflation impact student loans and should you be worried?
If you are like most professionals, you may have graduated with over $100,000 in student loans. Unlike credit card debt which was used to buy stuff you may not use for long, student loans financed your education and training that is the foundation for your career. But with rising inflation, there is growing concern that student loan rates and payments could increase as well.
How Inflation Actually Helps Student Loan Borrowers
The good news is that if you have a locked-in rate, inflation could actually be helpful. Inflation drives up the price of everything, including wages. This means some borrowers will be paying back certain fixed-rate loans with dollars that have less value than the ones they borrowed and your monthly payment does not increase.
So if the borrower has a fixed-rate student loan and has a salary that keeps up with the pace of inflation, then inflation can be helpful.
But Inflation Can Hit Some Private Loans Hard
While inflation can be good for those with a locked-in rate, the same can’t be said if you have a loan with a floating interest rate, such as a variable-rate private student loan.
Rates borrowers pay for floating-rate loans are typically pegged to prevailing market interest rates. Market interest rates tend to rise whenever lenders see inflation on the horizon. During times of higher inflation, borrowers should expect variable-rate loan interest rates to increase. If borrowers see a larger than expected monthly bill, it’s probably a variable-rate student loan with a rate adjustment.
So, with rising inflation predicted to carry over into 2022, it’s worth checking to see if your student loan has a fixed or variable rate. According to Ernest Burley, a certified financial planner, “With inflation on the rise, you do not want to be in a variable interest rate loan. It is a great idea to lock-in a low fixed interest rate on your student loan (or any loan).”
