For student loan borrowers, the interest rate is one of the key factors that determine how much money will ultimately be repaid. But unfortunately, it’s not always something you have a lot of control over.
If you’ve taken out a federal student loan, you probably don’t have to worry about variable interest rates because since 2006 all federal student loans have fixed rates. This means that the interest rate stays the same throughout the life of the loan. But if you have a private student loan, then your rates may or may not be variable depending on the type of student loan and the terms you agree to initially.
Variable interest rates tend to start lower and then increase over the life of the student loan depending on economic conditions. They are usually based on the London Interbank Offered Rate, known as Libor, and can change on a monthly, quarterly or yearly basis. Therefore, for borrowers looking for something more secure, federal student loans and private loans with fixed interest rates tend to be safer bets.
If you’ve already taken out a private student loan with variable interest rates and your rates have started to rise, don’t despair. You can manage it in different ways:
- Pay off your student loan faster.
- Try to lower your interest rate.
- Refinance your student loan.
Pay off your student loan faster. Use rising interest rates as a motivation to increase your payments and get out of debt sooner. If you have both variable and fixed interest rates, try setting additional payments towards your variable rate student loan and prioritize its repayment.
If your current income doesn’t allow you to increase your payments, take a close look at your spending each month and see where you can cut. Set a budget. You could also pick up a side crush like driving for Uber, walking a dog, or renting a spare room in your home.
Even if you only spend an extra $ 20 per month on your student loan, it could make a big difference to the length of your loan.
Try to lower your interest rate. You may also want to see if your lender can lower your rate at all or turn your variable rate loan into a fixed rate loan. If you’ve made regular and on-time payments, you might have a little more leverage to negotiate.
While there’s no guarantee anything will happen, it doesn’t hurt to ask.
Refinance your student loan. If the interest rate on your private student loans has gone up and you are unable to pay off the debt quickly or seem to be reducing it, you may be better off refinancing your student loan to a fixed rate.
With refinancing, you take out a new student loan from a private lender and then use it to pay off your old student loan. You can choose between a variable and fixed interest rate and decide on new repayment terms. If you have good credit, or are applying with a co-signer who does, your interest rates could be considerably lower than they currently are.
The other advantage of refinancing is that you can do it as many times as you want or need if you are eligible for a new loan. So if you refinance your student loan now and then later your credit rating goes up or rates go down, you might consider refinancing again for better rates.
If you have a federal variable rate student loan, that is, taken out before 2006, you may consider refinancing it to a private fixed rate student loan through a private lender. But keep in mind that you will miss the benefits of federal student loans, such as income-based repayment plans and deferral options.
For student loan borrowers facing rising interest rates, there are options to deal with them. Do what you can to reduce the interest rate on your student loan to something manageable. Otherwise, you could end up paying an astronomical amount of interest over the life of your student loan.