A lot has happened with the economy over the last four years. One of the biggest changes has come in the form of inflation, which rose at a rapid pace prior to efforts by the Federal Reserve to curb it. With this in mind, it's perfectly reasonable to wonder how inflation might affect your student loans. Higher inflation typically means paying more interest for variable-rate student loans. Even if you have a fixed-rate student loan, you may have less money to put toward y🔯our monthly debt payments if inflation causes your other expenses to become more expensive.

Increasing Rates for Federal Student Loans

The Fed increased the federal funds rate in March, May, June, July, September, November, and December of 2022 and through January–August 2023. These rate increases were implemented to help combat and ultimately stifle 澳洲幸运5官方开奖结果体彩网:inflation. The rate remained static until September 2024, when the Federal Reserve cut the rate 澳洲幸运5官方开奖结果体彩网:amid encouraging inflation numbers.

Rate increases make borrowing more costly in general, whether you have a 澳洲幸运5官方开奖结果体彩网:credit card balance or you're taking out a 澳洲幸运5官方开奖结果体彩网:personal loan. Federal student loans with fixed interest rates can also feel the imp💙act of inflation, although rising rates only affect borrowers who take out student loans in the future. The chart below illustrates last year's fixed interest rates for several types of federal student loans compared 🗹to what students are paying this year.

Source: Federal Register

Rising Rates on Variable Rate Loans

While borrowers with existing federal student loans benefit from fixed interest rates that won't change based on market conditions, borrowers with private student loans may not be so lucky. Many private student loans come with variable rates that can, and often do, increase over time.

Unfortunately, rates going up by as little as 0.5% or 1% can cause monthly payments and total interest charges to rise substantially. As an example, let's say you're beginning repayment on $20,000 in student loans with a current interest rate of 5%. In that case, the monthly payment on a 10-year 澳洲幸运5官方开奖结果体彩网:repayment plan would work out to $212.13.

When you play around with a 澳洲幸运5官方开奖结果体彩网:loan calculator, however, you'll see that boosting the rate to 5.5% increases the monthly payment from $212.13 to $217.05, whereas increasiꦛng the rate to 6% makes the monthly payment jump to $222.04. With each of these payment amounts, the total interest paid over 10 years works out to $5,455.12, $6,046.31, and $6,644.92, respectively.

In other words, you'll pay almost $600 more in total interest charges if your rate increases from 5% to 5.5% and over $1,189 extra in interest if your rate jumps from 5% to 6%. Of course, the impact only worsens if you owe more than $20,000 in student loans or your interest rate climbs even higher.

💟 Less Disposable Income Means Problems Making Payments

Inflation means that nearly everything you buy costs more, and this inevitably leads to having less disposable income in your pocket. Even if your monthly student loan payment doesn't change, you may still have less cash to make the required monthly payments as time goes on.

With that in mind, it's a good idea to take stock of how much you owe in federal student loan debt. Doing so can help you determine whether you can afford your monthly payment. If you're worried you can't, it's time to look into other student loan repayment options, such as 澳洲幸运5官方开奖结果体彩网:income-driven repa♌yment (IDR) plans.

Increased Wages Could Impact Payments

If you're fortunate enough to receive a raise due to inflation, you should also know that the monthly payment on your federal student loans could rise as a result. This mostly applies to borrowers who participate in IDR plans that base their monthly payments on how much they earn.

As an example, the Pay As You Earn (PAYE) repayment plan requires participants to pay 10% of their discretionary income toward their loans, so long as it's not more than they would pay on a standard, 10-year repayment plan. Additionally, keep in mind that the term 澳洲幸运5官方开奖结果体彩网:discretionary income is used to describe "the difference between your annual income and 150% of the poverty guideline for your family size and state of residence."

If you do ge🍸t a big raise, but the povertyꦚ guidelines in your state of residence remain the same, there's a good chance the monthly payment on this plan (and other IDR plans) could go up. If you're curious about what that change could look like, this from the United States Department of Education can give you an idea.

The Bottom Line

Inflation has a major impact on nearly every aspect of our lives, and that's especially true for people with student loans and/or other types of debt. If you're worried inflation may impact your ability to repay your student loans, you should reach out to your loan servicer and consider switching repayment plans.