Although it is uncertain how much the Fed plans to hike interest rates, many experts have said they believe it will be 0.25%. While some experts still predict the rate hike will not take place until 2016, others say a hike could still occur this fall. The good news is that the majority of borrowers will only see a minimal increase in their monthly payments unless a particular graduate borrowed larger amounts.
“A potential Fed rate increase of 0.25% wouldn't have much of an impact on the monthly payment for the average student loan borrower,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
The interest rates of federal student loans do not change during the duration of a loan. Individuals who took out a private loan with a fixed interest rate will not have to worry about having to pay extra either.
Borrowers who took out private student loans with a variable interest rates should expect increases in their rates and monthly payments, because the variable rate is tied to the prime rate, said Jason Vasquez, a spokesman for Wells Fargo (WFC) - Get Report, the San Francisco-based financial institution.
Interest rate increases are never favorable for borrowers, whether they have student loans or credit card debt, said Raj Rajan, CEO of Ceannate, a Rolling Meadows, Ill. company that works with the U.S. Department of Education on student loan and default issues. Graduates can look into plans which offer a reduction in monthly payment amounts, he said.
“Students do not react to rate changes the way auto or home buyers might, because their needs are more static,” he said.
Refinancing current student loans is another option since the amounts students are borrowing to pay for their four-year undergraduate college degrees are escalating across all income groups. The current low interest rates are also an advantage for graduates considering refinancing.
Many private lenders, including Wells Fargo, also offer modification programs based on employment status, salary amount or other variables, said Vasquez. “Wells Fargo customers who find themselves having difficulty making their monthly payments as a result of the change in the interest rate can contact us to see if they qualify for the modification program,” he said.
Private student loan lenders determine the interest rate a borrower will pay based on his credit score, said Andrew Hopkins, vice president of Discover Student Loans(DFS) - Get Report , based in Riverwoods, Ill. Although variable rates can be a good option, because the rates are lower than fixed ones, they tend to rise during the term of the loan.
“Unlike federal student loans, the interest rate is not the same for every borrower,” he said. “Students applying with a creditworthy cosigner may receive a lower interest rate.”
The variable rates for Discover’s range from 2.99% APR to 9.12% APR or the three-month Libor plus 2.62% to the three-month Libor plus 8.74%. The unknown factor with variable rates is that the three-month Libor rate could increase due to market condition, Hopkins said.
Advantages of Fixed Rate Loans
The fixed rates at Discover range from 5.99% APR to 11.49% APR, also depending on the credit score of the borrower.
Fixed rate loans give borrowers “a sense of stability” because the monthly payment amount is never altered unless the individual chooses a period of deferment or forbearance, he said.
Benefits of Variable Rates
The advantage of variable interest rates is that they start lower than fixed interest rates, but the majority are likely to increase over the life of the loan, Hopkins said.
“While a variable rate loan can help save money as rates drop, the reverse is possible when market conditions send the prime rate up,” said McClary. “Variable rate student loans are considered most beneficial to consumers when the trend indicates decreasing interest rates while fixed rate loans are the preferred option when rates are on the increase."