Here’s what inflation means for your student loans.
Here’s what you need to know — and what it means for your student loans.
With inflation now at a 40-year high, student loan borrowers may be wondering what impact inflation will have on their student loans. Inflation has made everything from gas to groceries more expensive. As student loan borrowers await news on student loan forgiveness and the student loan payment pause, you must understand what inflation means for your student loans. Let’s explore.
What inflation means for federal student loans
If you have federal student loans, the good news is that inflation won’t materially impact you. Why? Federal student loans have fixed interest rates, which means the interest rate won’t change over the life of the student loan. So, if the Federal Reserve raises interest rates, your federal student loan interest rate will remain the same. To understand the full impact of inflation, you can also evaluate whether your wages increase. If your wages increase more than inflation, you could have more purchasing power to pay off student loans faster. If your wages don’t rise faster than inflation, you may have less purchasing power to pay expenses and student loan debt. What if you’re borrowing federal student loans this year? Here are the new student loan rates. While federal student loan interest rates are fixed, they will be higher than last year’s interest rates.
What inflation means for private student loans
If you have private student debt, you could have either a fixed interest rate or a variable interest rate. A fixed interest rate means your interest rate won’t change even if the Federal Reserve increases interest rates. In contrast, a variable interest rate means your interest rate can change over time. This year, the Federal Reserve has been increasing interest rates to curb inflation. If you have variable interest rates, you should expect the interest rates on your variable student debt to rise. This will make it relatively more expensive to pay off student loans each month.
What inflation means for student loan forgiveness
President Joe Biden is considering wide-scale student loan forgiveness for millions of student loan borrowers. This could include $10,000 of student loan cancellation, for example. Alternatively, if progressive Democrats successfully persuade the president, Biden could cancel $50,000 of student loans. (Here’s how much student loan debt Biden could cancel). The White House expects any potential student loan forgiveness to have a minimal impact on inflation. However, critics of student loan forgiveness say wide-scale student loan cancellation will drive inflation higher. Why? Student loan cancellation puts more money into the pockets of student loan borrowers. While that’s a big win for individual student loan borrowers, these borrowers could spend their newfound money in the economy. That incremental spending increases demand, which doesn’t lower prices.
What inflation means for the student loan payment pause
The student loan payment pause ends on August 31, 2022. Student loan borrowers have enjoyed no federal student loan payments since March 2020. This means student loan borrowers haven’t been required to make a single federal student loan payment during the entire Biden administration. Republicans, in particular, say student loan payments should restart beginning September 1, 2022. They cite several reasons, including that the federal government will have lost nearly $150 billion as a result of temporary student loan relief due to the Covid-19 pandemic. Republicans in Congress argue that ending the student loan payment pause will decrease inflation. Why? Republicans say that as student loan borrowers pay student loans, they will have less money to spend in the economy, which lowers demand. Don’t wait for Biden to decide on student loan forgiveness or the student loan payment pause. No matter what the president decides, you’ll likely need a clear strategy for student loan repayment. Here are some of the best options to pay off student loans faster:
- Student loan refinancing (lower interest rate + lower payment)
- Income-driven repayment (lower payment)
- Student loan forgiveness (federal student loans)