You've probably heard by now that the Federal Reserve executed a long-awaited interest rate hike in December. Though this move was both inevitable and sorely needed, it's not great news for borrowers. In fact, your student loan interest rates might have gone up as a result.
Why did interest rates go up?
The last notable rate hike was in 2006, the year before the Great Recession took hold. Rates had been on a downward trajectory ever since, both as a response to economic crisis and as an incentive to move money.
But now that the economy is improving, rates have to go back up. Sadly, increasing the federal funds rate impacts more than the cost of borrowing money from a bank - it also pushes up the monthly payments on variable loans.
As a result, many people with certain types of student loans noticed a hike in their minimum monthly payments when they opened their student loan bills earlier this year. Other borrowers with variable rate loans will see their payments increase during the next few billing statements.
Since federal student loans always come with a fixed rate, borrowers who only have federal loans won't be affected. But those who have private student loans with variable interest rates might see their payments tick up over time.
If you find yourself in this sticky situation, or fear you're next, here are some steps you should take:
1. Take a look at your student loan statements
If you're not sure whether your student loans are affected by rising rates, the first step is to break out your monthly statements.
Take a few moments to compare your interest rate and monthly payment from last year to today's. If you have variable rate loans with a private lender and don't see any notable changes yet, you should call your student loan servicer and ask for details on what to expect in the next few months.
2. Assess the damage
How much rising interest rates will affect your payments will depend on how much money you owe and your former variable rate.
Because of the way interest on student loans is charged, those who owe the most will see the largest surge in their monthly payments. Meanwhile, those who owe very little may not see much of a change at all.
Either way, it helps to know how much more money you'll owe each month - if any at all.
3. Make room for a higher monthly payment
If your payment increased substantially, you'll need to find a way to handle it without neglecting your other financial responsibilities.
To "find room" for the larger payment, you can consider cutting down elsewhere - eating out less often and cooking at home more, spending less money on entertainment each month, or cutting some "splurge items" out of your monthly spending.
If your monthly payment ticked up $50 across your loans, for example, you could easily account for that increase by cutting one weekend night out with friends every month.
4. Earn more money
If the interest rate on your student loans has caused a world of hurt on your monthly budget, making more money is another solution. Getting a part-time job, taking up a side hustle, or asking for more hours at work can help you earn the extra money you need to make the higher monthly payment.
While working more may not be what you had in mind, you may only need to do so temporarily. And if you can manage to earn more money than what is required for your larger monthly payment, you may be able to throw even more cash towards the principal of your loans each month.
5. Commit to paying down your loans faster
While no one wants to pour more of their hard-earned dollars towards their student loans each month, there might be a valuable lesson from the experience.
That lesson - the real cost of debt - is one we will all encounter at various times in our lives. What we owe matters, and sometimes, the only way to get out of debt is the old-fashioned way.
If you hate the fact that your student loan payment is higher than it was before, now may be the perfect time to reassess your student loan debt payoff plan. If you have any extra cash leftover each month, throwing it at one or more of your student loans is an excellent way to pay off your loans at a much faster pace.
6. Consider refinancing
You could always consider refinancing your loans with a private lender to a lower, fixed rate. At the very least, it's almost always worth checking to see if refinancing might be advantageous.
If you have several private loans at variable rates, you may also be able to simplify your life by refinancing into a new loan with one low monthly payment as well.
The bottom line
However, it's easy to get caught off guard once you get used to paying the same low monthly payment every month. And if there's one surprise everyone hates, it's paying more money towards something that provides no real benefit in your life.
If you don't like your new payment, the best thing you can do is find a way to pay down your loans faster and get out of debt sooner. Take control of the situation and throw all of your energy into paying off your loans and putting them behind you.
Once you're debt-free, rising interest rates won't have the power to ruin your day - or your monthly budget.
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