How Inflation Affects Student Loan Borrowers

Loan type	Borrower type	Fixed interest rate for direct loans first disbursed on or after July 1, 2023 and before July 1, 2024	Fixed interest rate for direct loans first disbursed on or after July 1, 2024 and before July 1, 2025
Direct subsidized loans and direct unsubsidized loans	Undergraduate	5.50%	6.53%
Direct, unsubsidized loans	Graduate or professional	7.05%	8.08%
Direct PLUS loans	Parents and graduate or professional students	8.05%	9.08%

Source: Federal Register

Rising rates on variable rate loans

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

Unfortunately, an interest rate increase of just 0.5% or 1% can cause monthly payments and overall interest costs to increase significantly. For example, let’s say you start paying off $20,000 in student loans with a current interest rate of 5%. In that case, the monthly payment is made over a period of 10 years payment plan would come to $212.13.

When you play with a loan calculatorHowever, you will see that increasing the rate to 5.5% increases the monthly payment from €212.13 to €217.05, while increasing the rate to 6% will increase the monthly payment to €222. 04. For each of these payment amounts, the total interest paid over a ten-year period is $5,455.12, $6,046.31, and $6,644.92, respectively.

In other words: you pay a total of almost €600 more in interest if your interest rate rises from 5% to 5.5% and more than €1,189 extra in interest if your interest rate rises from 5% to 6%. Of course, the impact only gets worse if you owe more than $20,000 in student loans or if your interest rate rises even higher.

Less disposable income means problems making payments

Inflation means that almost everything you buy is more expensive, and this inevitably means you have less disposable income in your pocket. Even if your student loan monthly payment doesn’t change, you may still have less money to make the required monthly payments as time passes.

With that in mind, it’s a good idea to take stock of how much you owe on federal student loans. Doing this will help you determine if you can afford your monthly payment. If you’re worried this won’t work out, it’s time to look at other student loan repayment options, such as: income-driven repayment plans (IDR)..

Higher wages may affect payments

If you are fortunate enough to receive a pay increase due to inflation, you should also know that the monthly payment on your federal student loans may increase as a result. This is especially true for borrowers who participate in IDR plans that base their monthly payments on how much they earn.

For example, the Pay As You Earn (PAYE) repayment plan requires participants to pay 10% of their discretionary income toward their loans, as long as this is no more than they would pay under a standard 10-year repayment plan. Additionally, keep in mind that the term discretionary income is used to describe “the difference between your annual income and 150% of the poverty line for your family size and state of residence.”

If you do get a large pay increase, but the poverty guidelines in your country of residence remain the same, there is a good chance that the monthly payment for this plan (and other IDR plans) will increase. If you’re curious about what that change might look like: this loan simulator from the U.S. Department of Education can give you an idea.

Do Higher Interest Rates Affect Student Loans?

Rising interest rates mean that fixed interest rates on federal student loans will increase for future borrowers. Higher rates also affect variable interest rate student loans, where interest rates fluctuate based on market conditions.

Should I refinance my student loans?

The decision to refinance your student loans is a personal one, but you should know that you are giving up federal benefits when you refinance federal student loans with a private lender. For example, you give up the opportunity to request a postponement or tolerancein addition to your ability to participate in income-driven repayment (IDR) plans.

How Does Increasing Student Loan Debt Hurt the Economy?

Increasing student loan debt can affect the economy in a number of different ways, all of which tie back to the fact that student loan payments leave borrowers with less discretionary income.

Let’s say you recently graduated and have a lot of student debt, and you also want to start a business. However, you probably don’t have enough savings to cover both your monthly loan payments and start-up costs, or you may not qualify for a small business loan.

Furthermore, if a large portion of the population spends a significant portion of their discretionary income on loan payments, they won’t be able to spend as much and businesses won’t be able to make as much profit.

The bottom line

Inflation has a major impact on almost every aspect of our lives, and that’s especially true for people with student loans and/or other types of debt. If you are concerned that inflation may impact your ability to repay your student loans, contact your loan servicer and consider switching repayment plans.