Student loans

High inflation is bad news if you have student loans. here’s why

This story is part Recession Assistance ServiceCNET’s coverage of how to make smart money moves in an uncertain economy.

Student loan forgiveness is a priority for most borrowers. But if you’re not eligible for recent President Biden student loan forgiveness plan or if you will still have a balance in January, inflation could make your student loans even more expensive.

Despite a slight slowdown in July, prices continued to climb, leaving inflation close to record. And if you have student loans, there’s another reason to be concerned.

Typically, a period of high inflation, such as the one we are currently experiencing, makes it difficult for borrowers to repay existing debt and may continue to drive up private student loan rates.

When the break on federal student loan payments expires at the end of Decemberif inflation is still high, it may be more difficult for borrowers to restart monthly student loan payments.

Here’s everything you need to know about the impact of inflation on your student debt.

Inflation and 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 10 years ago is worth more than a dollar today. So as long as your wages are rising with inflation, debt from a loan you borrowed in the past will be worth less. today,” said Mark Kantrowitz, student loan expert and author of How to Apply for More College Financial Aid.

However, average wage increases are not keep up with inflation. In June, wages had only increased by 5.1% over the past 12 months, making it harder for borrowers to reduce their 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 their lifetime.

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 kept up with or exceeded the rate of inflation.

If, like most Americans, your salaries haven’t gone up much and your budget is even tighter than before, this devalued debt won’t help you – and you might even find it more difficult to repay your loans 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 this year:

Interest rates on federal and private student loans will be higher for the 2022-23 academic year, Kantrowitz said. The new federal interest rates on student loans for School year 2022-23 are the following:

  • 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 Bankratewhich is owned by the same parent company as CNET.

Will inflation make it harder to repay loans after the federal payment break ends?

For many, paying off student debt in times of high inflation is a real concern. According to Student Debt Crisis Centerout of 23,532 borrowers, 92% of those working full time fear they will not 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.

While Biden’s $10,000-20,000 federal loan forgiveness will help some borrowers eliminate debt entirely or reduce it significantly, others with higher debt balances may struggle to pay debts. monthly payments. If you’re worried about paying off your student debt when the break expires, here are some steps to consider right now:

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. Currently, each IDR plan caps payments between 10% and 20% of your discretionary income (income after taxes and necessities paid) and cancels your loan balance after 20 or 25 years of payment. However, under Biden’s proposed new IDR plan, payments would be as low as 5% of your Discretionary Income, which could lower your monthly costs.

For example, if you are currently on an IDR and your monthly discretionary income is $1,500, you could pay up to $225 per month (20%). However, under the new IDR, this could be reduced to $75 per month, saving you $150 per month or $1,800 per year.

2. Check if you are eligible for additional loan forgiveness

Whether or not you qualify for the recently announced federal student loan forgiveness, there are other forgiveness programs to consider.

If you are a teacher, first responder, civil servant or government employee, you may be eligible for federal student loan forgiveness under the Civil Service Loan Cancellation Program. You must be in an eligible position, hold eligible federal student loans, and have made 120 eligible payments to qualify for 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 now qualify some applicants 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 may not change if you haven’t reached the 120 payment goal yet, you will at least be one step closer to student loan forgiveness.

3. Refinance private loans

With many interest rates continuing to rise throughout this year, refinance your adjustable-rate private student loans in fixed rate student loans earlier could help you save hundreds, 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. Whereas adjust your budget daunting, 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 job, according to a 2022 Bankrate survey. Having an extra source of cash can help fill a void in your budget and give you some respite.