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When the Federal Reserve raised interest rates in December, it announced its plans to con­tinue this trend as the economy improves, which means taking out private loans to pay for college just got trickier.

Hillsdale stu­dents beware: because the college doesn’t accept federal loans, you can’t get a federal student loan with a per­ma­nently fixed rate to pay for your tuition. That means you’re limited to private loans, and deciding which ones can be con­fusing and ter­ri­fying.

Based on the Fed’s behavior, you should apply for only fixed-rate student loans for the near future — the interest rates of variable-rate loans will fluc­tuate with the market based on the Fed’s benchmark. Because the Fed is com­mitted to raising rates in the growing economy, variable-rate loans are riskier, and will probably require bigger payoff pay­ments once you’re out of school (and no one wants that). Even though variable-rate loans could poten­tially have lower interest rates than a fixed-rate loan, right now that isn’t likely.

Adjunct pro­fessor of finance Joe Banach told The Col­legian that variable rates are most affected by current market trends, and that for now, they’re rising. But it’s not a one-way rela­tionship: if the Fed raises interest rates, the market will assume that the eco­nomic forecast is good. Con­se­quently, share­holders will buy more shares of com­panies, com­panies will take more risks and make more or bigger invest­ments, and poten­tially there will be more initial public offerings (which means more com­panies will go public and sell shares of the company in the stock market).

Banach added that it is wise to avoid variable-rate loans right now, because the market and Fed con­sensus is that rates will con­tinue to go up. Fixed-rate loans have fixed interest rates that won’t fluc­tuate over time, so when you take out a fixed-rate loan, you know exactly how much you will pay off per month after you graduate.

“Over time the variable rate will probably be higher than the fixed rate,” Banach said.

If you already have a variable-rate loan, or several, Banach said it is wise to start making small pay­ments on your loan’s prin­cipal — that is, the original amount you bor­rowed. That builds con­fi­dence in your ability to take charge of your money, even if you’re only making pay­ments of $25 per month.

“You have to think about what brings you con­fi­dence, it’s a psy­cho­logical thing,” he said. “That way you can see what can be done, and that gives you the con­fi­dence to pay it off later.”

While not every college student can afford to make even small pay­ments on their loan prin­cipals, the point is to take charge of your financial sit­u­ation and make sure you’re taking steps to ensure some financial sta­bility when you graduate.
Start by avoiding the variable-rate loans for now, and pay attention to the market if you already have them.