Rising interest rates will hit student borrowers


Larisa Elizondo graduated from the University of Michigan debt-free, but to get a law degree she had to take out about $160,000 in student loans. She says she learned quickly that it would not be easy to repay her loans because of her salary at the time.

“There was a time when I had to get a second job as a waiter at a bar so I could do it all, because, you know, my student loan payments were $1,150 a month,” said Elizondo.

Now Elizondo feels like he’s finally reached a stage in his career and earned enough to start a family.

“It wasn’t really until the last two years that I felt like I could financially afford it. I mean, having a kid the way I want,” Elizondo added.

But rising interest rates are worrying some student borrowers. On Wednesday, the Federal Reserve raised interest rates by just under one percent, the biggest increase in nearly 30 years, to keep inflation under control.

“I tried to figure out, should I refinance, do something to refinance the other private loans?” said Elizondo, who still owes about $40,000 in private student loans and $30,000 in federal student loans.

“The majority of Americans have federal student loans. That’s over 80% of today’s student loan market, but there’s a limit to the amount of federal student loans a borrower can sometimes take out. So many families use private student loans to bridge the gap,” explained Cody Hounanian, executive director of the Student Debt Crisis Center. The non-profit organization offers assistance to borrowers and works to impact public policy, with the goal of ending the student debt crisis.

The difference between the two types of student loans is that interest rates on federal loans are fixed, but most private student loan rates are variable. This means that rising interest rates will likely make private student loans more expensive to repay.

“When the Fed raises interest rates, private student loan interest rates go up, as well as auto loans and mortgages,” Hounanian added. “I should also note that people with private student loans and federal student loans probably have other loans in their lifetime. So when we see interest rates going up, that means their mortgage has probably gone up, their rent could go up because someone else’s mortgage has gone up on top of inflation with food and gas All of this is taken out of their monthly budgets and so the current situation makes repayment of your loans students even more difficult.”

Experts at NerdWallet, a website offering free financial advice, OK. They note that rising interest rates, not directly related to the increase in the Federal Reserve, will also make loans more expensive for those taking out federal student loans for the upcoming school year.

“So new federal student loan borrowers are going to see their own interest rate hike starting July 1…Interest rates next year will be almost double what they were a year ago. is two years old,” said Anna Helhoski, student loan expert at NerdWallet. “So if you’re someone who has to take on private student loan debt, you’ll end up paying more over time than if you borrowed a year or two ago…Borrowers who also want to refinance their student loans have been able to do this, over the past two years, at historically low rates and it looks like the tide is turning on that.”

Sen. Elizabeth Warren (D-Mass.) is among a group of lawmakers calling on President Joe Biden to forgive $50,000 in federal student loan debt for each borrower.

“There’s a reason I’m supporting the cancellation of $50,000 in student loan debt. First, it would eliminate all debt for about 85% of those with student debt and make debt manageable for many who still owe. It would also give us a chance to help close the racial wealth gap in a way where there just aren’t many tools to do so. If President Biden canceled $50,000, he would close the black-white wealth gap for those with student loan debt,” Warren said.

Hounanian explained that Warren’s request was not unrealistic and said it was one of the few issues the president could pull a single lever on to provide federal student loan debt relief.

“What is unique about the student loan problem is not only [Biden] having the power to cancel student debt itself, the power is quite simple, it’s very black and white. The president can forgive as much student loan debt as possible and there’s not a lot of nuance to that other than he has to direct the Secretary of Education to take such action,” continued Hounanian.

The White House said the president has already authorized about $25 billion in relief for borrowers over the past 18 months. This relief, however, was targeted to help a portion of borrowers. Supporters, like Warren, still hope he will do more by offering broader relief.

“Please, Mr. President, today would be a great day to write off $50,000 in student loan debt,” Warren added during our interview.

As for how borrowers can reduce the cost of repaying student loans in the future, Helhoski said there are steps students can take now.

“Thus, new borrowers should always submit the FAFSA first. This is the free application for federal student aid that determines if borrowers are eligible for federal student loans. These loans come with more repayment options, such as income-contingent repayment and forgiveness opportunities, compared to private loans.So always start with the FAFSA first.Then, if you need a private student loan because you still have a gap to fill, then you’re going to want to compare the private loans that are offered by the interest rates, as well as the repayment options that they carry,” explained Helhoski.


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