How Inflation Could Affect Your Student Loan

Photographed by Megan Madden.
When President Biden announced in early April that the pause on federal student loan repayment has been extended to September 1, those of us who have been shouldering the burden of debt from higher education let out a colossal, collective sigh of relief. And while we’ll have a few more months to save up to pay down our debt, there's another economic force at large that's now dwindling our wallets: inflation.

The prices of goods and services climbed 8.5% at the end of March, according to the Bureau of Labor Statistics (BLS) Consumer Price Index, the sharpest 12-month increase in the last 40 years. Pretty concerning, no doubt. Inflation not only impacts consumer goods, making everything from our restaurant bills to the cost of a pair of shoes more pricey, but it can also impact the interest rates we're paying on our loans.

How inflation can impact student loan debt

First, the good news: If you already took out federal student loans, the interest rates on those are fixed, which means the interest rate doesn't change during the life of the loan, says Jared Andreoli, a certified financial planner, certified student loan planner, and founder of Milwaukee-based Simplicity Financial. So no matter what economic conditions are brewing, or the future increase in interest rates on different types of loans, you'll be paying the same amount (principal plus interest) each month during the stint of the loan.

But if you're a soon-to-be-borrower, taking out loans for the coming school year for example, there's a chance you might pay more in interest. The federal student loan interest rates on new loans are adjusted each year, explains Akeiva Ellis, a certified financial planner and education specialist at the Boston-based Ballentine Partners. Oftentimes, inflation hits the "go" button for the Federal Reserve to raise interest rates to fight inflation. "As interest rates rise, so will the rates on student loans for new borrowers," says Andreoli.

What about private student loans?

For those who took out loans from private lenders like Sallie Mae, SoFi, and Earnest, there will be more fluctuations in their rates. That's because most private lenders offer variable loans, and the rate on variable loans can go up and down in response to when major indexes, such as the prime rate, changes. This means as interest rates go up due to inflation, your private loans will cost more. "It'll impact any variable interest rates borrowers currently have along with the rate they would be able to obtain if refinancing," says Andreoli.
Take this (totally made up) example: if you took out a 10-year private student loan with a 4.87% rate (the current average) for $10,000 now, and paid about $105 each month, you're looking at $2,652 in interest fees over the entire course of the loan.

So what happens when that interest rate gets bumped up to 5.87%? If you're making the same monthly payments on that $10,000 private student loan, that would mean $3,244 in interest fees, which is almost $700 more for the same amount of borrowed money.

It might be harder to keep up with your student loan payments

If you're in a bit of a hard spot financially, it will certainly be tough-going to stay on top of your loan payments. For many of us, the pandemic put what savings we had up in flames. And the sad truth is, wages have, for most of us, have been pretty much stagnant since 1979.

We're likely feeling the squeeze of the price of everything going up. That, plus our earnings not keeping up with inflation, means less money at the end of the day to cover our bills. "With student loan payments being $0 for so long, and inflation being so high, borrowers need to take a hard look at their budgets so they're prepared for the student loan payments to turn back on," says Andreoli. 
That’s of course, easier said than done. If you have the means, start putting away a little each month — even if it’s $50 — to prepare to start paying your student loan payments in September. "You don't want student loan payments turning back on to be such a shock to the system that you end up in more debt," says Andreoli.
If that’s not an option, one route to consider is reaching out to your student loan servicer to switch your federal loan repayment plan to either income-based or income-contingent plans, which means the less you earn, the less your monthly student loan payments. "These options may help make things more manageable," says Ellis.

Another route to take? Swap out your current repayment plan to a graduated or extended plan, which would mean lower monthly payments. Ellis suggests playing around with Student Aid’s Loan Simulator to gauge how your monthly payments might shake out under each plan.

As for those considering private student loans, be sure to do some comparison shopping on lending platforms like Credible, Student Loan Hero, and LendingTree. And if you already have private loans, the experts we spoke with say to consider refinancing, which could mean saving on total interest or bumping down your monthly payments.

If you can't swing your anticipated payments, see if you qualify for deferment or forbearance on your federal student debt by reaching out to your student loan servicer. (Remember, with deferment, you might still be on the hook for paying interest that racks up during your deferment period.)

Last, try to stay on top of your financial housekeeping with student loans, recommends Ellis. This includes reviewing the contact information on your loan so the accounts are up to date, knowing who your student loan servicer is, and being on the lookout for correspondence from the Department of Education or student loan servicer about your loans. Plus, make sure autopay is enabled so you don’t accidentally forget to pay and accrue more interest, says Ellis. That way, when student loan repayments start up again, things go off without a hitch.

Will student loans ever be canceled for good?

This week, the Department of Education announced that roughly 40,000 people will now qualify to have their student debt canceled through the Public Service Loan Forgiveness program. The department will also work to help millions more reach student loan forgiveness under an income-driven repayment (IDR) plan over the next 20-25 years.
For the rest of us, whether or not federal student loan debt will be fully forgiven is a big question mark. While Democrats and student loan borrower advocates have been pushing Biden to cancel up to $50,000 for student loan borrowers (something you’ll recall he promised during his campaign), and while he has excused debt for certain groups of people, Biden excluded student loan cancellation from his 2023 budget proposal back in March. 
No matter what, it's best to expect to start paying your loans in the near future. That way, you won't get blindsided. "Don’t wait until the last minute," says Ellis. "Understand the steps and what you need to do so that you can quickly adapt before you end up potentially missing payments and messing up your credit." 

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