Interest rates are rising for various loan products across the U.S., and student loans are no exception.
Recently, the Department of Education said interest rates will increase from 4.45% to 5.05% for the 2018 to 2019 school year. And interest rates on graduate student loans are expected to rise from 6.0% to 6.6%.
Why does this matter? Nationwide student loan debt already sits at $1.5 trillion as of Q1 2018, and interest only increases the burden. But by securing low student loan rates through refinancing or other strategies, loan holders can shave off thousands of dollars in interest costs.
Here are a few things to keep in mind.
Preventing Massive Student Loan Debt
If you don't already have student loans and you're worried about the possibility of interest rates rising beyond the 2018 to 2019 school year, you still have a lot of options. As The New York Times notes, experts recommend being conservative with student loans in the first place. Borrowing only what you need can help you limit the amount you'll pay back in the long run.
Before taking out a loan, research the lender. Find out what kind of rates and pay-back terms you can expect, and search for complaints against the lender with the Better Business Bureau and the Consumer Financial Protection Bureau.
Refinancing Your Student Loans
Forbes calls refinancing your student loans "your best move to protect against rising interest rates." Combining existing federal loans and private loans into a single private student loan could mean moving to a lower interest rate. This option also allows students to use a fixed interest rate to combat against rising interest rates down the line. Just remember you may lose some of the protections you get with federal student loans.
If your credit score has improved since you took out a private loan, you may qualify for a lower rate—whether it's fixed or variable. This is one of the reasons you should aim to build a positive credit history after graduation.
Fixed vs Variable Loans
Securing low student loan rates also depends on the ability to secure a fixed-rate loan. Fixed-rate loans "lock in" the interest rates from the outset, so you'll know how much interest you'll pay from the start.
Not everyone's opting for fixed-rate loans, though. Variable-rate loans can come with low interest rates, which means they're more enticing from the outset. However, hikes in these interest rates can dramatically increase the amount you pay over the lifetime of the loan.
For those who fear interest rates are only going up, paying a little more upfront for a fixed-rate loan can secure that relatively low rate for years. And while some seek variable-rate loans with the intention of paying them off early, this is usually not an ideal strategy if unforeseen circumstances come along the way, making it more difficult to pay off the loan ahead of schedule.
Does Credit Impact Student Loan Rates?
Although a good credit score can have a big impact on a mortgage, student loans are unique. Many student loans are fixed as a matter of regulation, which means students don't need good credit to get federal loans. However, if you want to refinance the loan after graduation, you'll need a good credit score. You can build healthy credit by making on-time payments and maintaining a low debt-to-credit ratio. To do this, keep your credit card accounts open and your balances low.
Implementing these strategies won't necessarily yield a bargain in student loans, but it can help ensure low overall rates in uncertain economic times. And while it's difficult to predict the future, it's possible that interest rates overall are headed higher beyond 2019.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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