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.