Loans: Will the in­ter­est rate hike af­fect stu­dent debt?

Con­sider re­fi­nanc­ing vari­able loan fol­low­ing Fed’s in­crease

Milwaukee Journal Sentinel - - Business - Sarah Hauer Sarah Hauer can be reached at shauer@jour­nalsen­tinel.com or on In­sta­gram @HauerSarah and Twit­ter @SarahHauer.

Bor­row­ing is more ex­pen­sive again. For the 40plus mil­lion Amer­i­cans with stu­dent debt, that sounds scary.

The Fed­eral Re­serve hiked in­ter­est rates Wed­nes­day, putting the fed­eral funds rate be­tween 1.75 per­cent and 2 per­cent. The cen­tral bank also sig­naled that it will likely in­crease rates at least one more time this year.

The good news: Noth­ing will change to loans al­ready taken out at fixed rates.

But, said Greg McBride, se­nior vice pres­i­dent for Bankrate.com, if you have a vari­able-rate loan, the in­ter­est charged month to month could in­crease.

“If you have a vari­able-rate stu­dent loan,” McBride said, “that change will show up quickly.”

Brenda Camp­bell, the pres­i­dent and CEO of Se­cureFu­tures, ad­vises stu­dent loan hold­ers to check with pri­vate lenders about rates.

“You also should con­sider re­fi­nanc­ing your vari­able-rate loans with a fixed-rate loan to see if you can save money,” Camp­bell said. Se­cureFu­tures pro­vides fi­nan­cial lit­er­acy ed­u­ca­tion to teens.

The new rates for bor­row­ing go into ef­fect July 1, so stu­dents tak­ing out loans for the up­com­ing school year will see the changes re­flected in their agree­ments.

“You won’t nec­es­sar­ily feel it right away,” McBride said about stu­dent loans that have de­fer­ment and grace pe­ri­ods be­fore pay­ment is re­quired.

“Even if you don’t have to make pay­ments, the in­ter­est is ac­cru­ing,” he said. “If you’re work­ing part­time dur­ing school, knock down that bal­ance to limit your ex­po­sure. If you take ad­van­tage of the grace pe­riod, it might be easy on your bud­get now but will be added to your bal­ance when you do start mak­ing pay­ments.”

McBride said the bot­tom line is to min­i­mize bor­row­ing.

“Lim­it­ing bor­row­ing is a great de­fense against a large debt bur­den on the other side,” he said.

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