CHICAGO – January 20, 2022 – (Newswire.com)
Consumers fear inflation because its most obvious effect is rising prices. There is more than that. Inflation also lowers the value of the currency, usually causes wages to rise, and minimizes the impact of fixed-interest debt. For individuals with outstanding student loans, inflation can be negative or positive, depending on your loan structure.
Before consolidating and refinancing student loans, it is important to understand the effects of inflation. According to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS) in early December, prices rose 6.8% over the previous 12 months. Interest rates remain low, but the Federal Reserve (Fed) has indicated that it will raise them in 2022.
To offset some of that, wages are also on the rise, with 21 states raising their minimum wages earlier this year, causing a ripple effect across multiple industries. In summary, consumers face higher prices, wage increases and interest rates that will rise over the next few months. Here’s how it affects student borrowers.
Scenario #1: Variable Rate Student Loans
This is the group most affected by inflation. A variable rate student loan means that when interest rates rise, your monthly loan payments will increase. The Fed has announced that there could be up to three interest hikes in 2022. That variable rate that has benefited you while interest rates have remained near zero is about to become a liability.
The most obvious solution is to refinance your variable rate loan into a fixed rate loan before the first interest rate hike takes effect, which is expected to take place in March. Borrowers can do this in one go with just the loan or as part of a debt consolidation strategy that includes paying off high interest credit card debt.
Scenario #2: Fixed Rate Student Loans
Having a fixed rate student loan right now is an advantage in times of inflation. Prices go up, but so do wages, giving you more money to work with. Meanwhile, your monthly fixed rate loan payment remains the same, protected from any interest rate hikes the Fed may initiate later this year. Your best bet might be to change nothing.
An exception to this rule is refinancing for a lower fixed rate. This is a good time to shop around for interest rates if your loan is several years old and you haven’t looked at interest rates since you took it out. Rates are still historically low and there might be a better deal available. Talk to your local bank, credit union, or find an online lender that does student loan refinancing.
In summary: it’s time to review your student loans
Inflation will continue as the world slowly recovers from the economic devastation of the pandemic. Review your student loans and any other debt you currently hold. Eliminate variable interest loans and credit accounts if you can, as interest rates are rising. Refinance for lower fixed rates if possible. Do not wait. Now is the time to do so.
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