Loans: Will the interest rate hike affect student debt?

Consider refinancing variable loan following Fed’s increase

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.