Inflation has made headlines in the past few months as the prices of everything from food to housing continue to rise to levels not seen in 40 years.
Trying to get everything back to normal Federal Reserve raised interest rates by 0.25% last week – and that’s just the tip of the iceberg. Since inflation is currently 7.9%, The Fed may raise interest rates six more times within a year to reach its 2% target.
With Student loan repayments to resume in Mayyou might be wondering how this will affect your loans and your monthly budget.
Today, I’ll walk you through the ins and outs of high inflation for your student loans and how you can financially prepare for what’s to come.
Inflation can be a good thing for student loan borrowers
BUT recent poll held Student Debt Crisis Center and Savi, a social impact startup, found that 92% of student loan borrowers are concerned that Inflation will make it difficult to repay loans. Some are skimping on things like food and health care, fearing their budgets could dry up once payments resume.
But Landon TanCFP and financial advisor in LPL financialsays we shouldn’t worry too much about this, as “inflation usually works in favor of indebted students.”
Here’s how.
According to Education Data InitiativeMost student loan borrowers have federal fixed-rate student loans. This means that no matter what happens to the economy right now, your interest rate will remain the same for the life of the loan.
“So the benefits will stay the same even if other things, including wages, go up,” Tan says.
And he also draws excellent conclusions.
When there is inflation, many companies offer their employees a pay raise. They do this for two reasons: first, to keep them from looking for better paying jobs elsewhere, and second, to help them cope with the rising cost of living.
If your company gives you a raise and you have federal student loans or fixed-rate private student loans, Tang says you’re a gold man.
Since your interest rate will be the same as when you were earning less, your student loan payment will now be a smaller portion of your salary, leaving you with more wiggle room for other expenses.
However, there is one caveat.
Due to all the pressure caused by the pandemic, companies are operating on a smaller budget. So getting a big raise in salary can be difficult. Actually, according to the Society for Human Resource Managementonly 44% of companies in the US plan to raise their employees’ salaries above 3% this year.
“If inflation makes life more expensive and your salary doesn’t increase accordingly, Tan says there will be less money to pay off the loan,” says Tan.
In other words, to capitalize on this situation, you need to take out a fixed-rate loan and get a substantial raise from your employer.
More: The best salary negotiation tactic is how to get a decent salary
When inflation means bad news for your student loans
You have nothing to worry about if you have federal student loans or fixed rate private student loans because lenders cannot change your interest rate or the amount you pay each month.
But if you’re like me and have a combination of both federal student loans and variable rate private student loans, then things can get a little tricky.
“The Fed is already planning to raise interest rates, and lowering inflation is one of the reasons they are raising those rates,” Tan says. “When these rates rise, consumer floating rates should rise accordingly, including your floating rate student loans,” he adds.
So, if you have variable rate private student loans, it’s very likely that your lender will raise your interest rate, which means your minimum payment could also go up, eating into a larger portion of your budget.
And, if inflation persists and you still have a long way to go before paying off your debt, that also means you could end up paying hundreds of interest on interest over the life of the loan.
“The problem is we don’t know exactly where and when the bets will land,” Tan says.
Likewise, if your employer gives you a raise and you have federal student loans for income-adjusted repayment planyour payments may increase.
You may or may not remember, when you use an income-based repayment plan, your monthly payment is adjusted to 10% of your discretionary income. So, if you are earning more, it is likely that you will have to pay more every month.
What can you do to lower your payments?
“Many borrowers have both public and private loans.” Aaron Smith, co-founder of Savi, says. “It’s very common and one of the things we tell people is that you should treat these two loans completely differently.”
So, here are a few options you can explore to make your payments more manageable, depending on the type of student loan you have.
If you have federal student loans…
Apply for an income-based repayment plan
If you’ve been making standard payments – or not paying at all – during the two-year repayment gap, then applying for an income-focused repayment plan might be a good idea to lower your student loan payment.
As I mentioned, these plans adjust your minimum payment based on 10% of your discretionary income, which can be a huge relief for your wallet.
You can apply for an income-based repayment plan by logging into your account at studentaid.gov or by contacting your student loan provider.
Find out if you qualify for Forgiveness for Public Service Loans (PSLF) or other public assistance programs.
If you are a teacher, nurse, public sector worker, or non-profit organization, Smith recommends applying for Government Loan Forgiveness Program (PSLF).
Under this program, borrowers who qualify for a student loan can write off their debt after making 120 consecutive payments.
In addition to the PSLF, other government and state programs will help you pay off debt for working in one of the sectors mentioned above.
If you’d like to learn more, visit your state government’s website to see what you can qualify for.
If you have private variable rate student loans…
See if refinancing can be good for you
Unfortunately, private student loans don’t offer any income-based repayment plan options or anything like that. So the best thing you can do is see if you can refinance your loans change the floating interest rate to a fixed one.
However, this only makes sense if your income has increased substantially since you took out the loan and you have an excellent credit score. Otherwise, you may not be able to secure better terms or interest rates.
Sign up for auto pay
Okay, you’re probably thinking, “How will this help?” Listen to me.
Most private lenders offer a 0.25% discount on the loan interest rate for subscribing to automatic payments. And since the Fed has only raised rates by 0.25% (at least for now), this small discount could help you balance things out.
Summary
Being a student loan borrower during these volatile economic times can be challenging. However, you can make things work with some careful planning.
The most important thing is to take action now rather than wait until the last minute to explore repayment options.
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