How Fed Interest Rate Increases Affect Student Loans

Since the fourth quarter of 2015, the Federal Reserve, the central bank of the U.S., has steadily raised interest rates, sometimes more than once a year.

In prior years, as a result of the recession, interest rates were effectively at zero percent. These decisions are based on a variety of factors, but a primary reason behind the incremental adjustments has been a strengthening economy that is putting pressure on inflation rates. The U.S. economy is expected to maintain strength through 2019 and inflation rates should be above 2 percent, which leads many economists to suggest there will be more rate increases before the calendar changes again.

As a student loan borrower, it is important for you to know how each Fed rate increase affects the interest on your loans, if at all. Conversely, it is important to know when your interest rate may change because of factors unrelated to changes in the Fed rate. Fortunately, the Student Loan Ranger has some answers to help clear up any confusion.

[Read: How to Prepare for Rising Student Loan Interest Rates.]

Here are some things to know about interest rates as they relate to your student loans.

Federal student loans are set to a fixed interest rate unless they originated before 2006. If you are already repaying federal student loans that you borrowed since 2006, you can rest assured that the Fed rate increases have no direct impact on them. Those still repaying older student loans with variable rates will be faced with a different situation, similar to more recent private student loan borrowers.

If you aren’t finished borrowing, however, you should be aware that the Department of Education adjusts interest rates annually on newly issued federal direct loans. Since the Higher Education Act was amended in 2013, these loans have been benchmarked to 10-year Treasury notes and undergo an annual reset.

This will be done by adding 2.05 percentage points to the rate for 10-year Treasury notes auctioned in May and will lead to new interest rates for any new undergraduate direct loans on July 1, 2019. The add-on for federal direct loans for graduate school students is 3.6 percentage points, while rates for parent PLUS loans equal yields on the 10-year Treasury note plus an add-on of 4.6 percentage points.

Here’s what that means in practical terms, based on last year’s Treasury yield rates: For undergraduate students who take out new federal direct subsidized and unsubsidized loans, the July 1 adjustment could lead to an increase of $3,713 for anyone borrowing $30,000 on a standard 10-year repayment plan, compared with what he or she would pay throughout the life of the loan at the current rate. That means an increase of $31 a month.

For graduate and professional students who take out new direct unsubsidized loans, the interest rate adjustment could lead to an increase of $6,913 for someone borrowing $30,000 on a 10-year repayment plan, compared with what he or she would pay throughout the life of the loan at the current rate. That means an increase of $58 a month. Keep in mind, however, that these are estimates, since this year’s Treasury auction hasn’t happened yet.

[Read: 11 Terms You Need to Know Before Repaying Student Loans.]

Some private student loan rates can be affected when the Fed rate increases. For other loans with variable rates, adjustments are likely to occur when the Federal Reserve rate increases. Some private student loans are in this category, so it helps to know what to expect when changes take place.

Most private lenders use Libor, which stands for the London Interbank Offered Rate. This is the rate banks use when they exchange funds between themselves.

When the Fed rate goes up, it usually means that Libor will follow suit. It’s wise to keep a close eye on your statements to monitor rate changes and their impact on your loan terms. Pay close attention to what these adjustments do to your monthly payments and how this can influence your budget.

[See: 10 Questions to Ask Before Borrowing a Private Student Loan for College.]

Depending on how much you owe, a single rate adjustment could add thousands to the total amount you repay over the life of the loan.

There isn’t any need to panic, but you may want to review refinancing options if you feel that further rate adjustments will make it difficult to maintain your variable rate loans. Private lenders offer refinancing options that can move you from a variable interest rate into a fixed rate loan. Keep in mind that you will have to meet loan approval guidelines, meaning that you will need a qualifying credit score and proof of income.

In the end, whether you plan to obtain a federal student loan or finance your education with funds from a private lender, you should be aware that rates change under a variety of circumstances. If you’re planning to take out a new federal, fixed-rate loan, the Student Loan Ranger suggests that you keep an eye on the schedule of rate adjustments to understand how they will affect the amount you have to repay. The timing of your loan approval can make a big difference in your budget when you have to repay your federal student loans.

For variable rate loans, talk to your lender to review the rate adjustment history for the past couple of years and to learn about how possible future adjustments will affect your loans.

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How Fed Interest Rate Increases Affect Student Loans originally appeared on

Clarification 03/01/19: A previous version of this article was not clear that additional interest new borrowers may need to pay as of July 1 are based on estimates.

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