Student Loan Interest Rates Could Rise Upon Fed Action

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By Ellen Chang

NEW YORK -- Student loan borrowers can expect the interest rates of their current private loans to rise slightly once the Federal Reserve increases rates.

Although it is uncertain how much the Fed plans to hike interest rates, many experts have said they believe it will be 0.25 percent. While some experts still predict the rate hike won't take place until 2016, others say a hike could still occur this fall. The good news is that the majority of borrowers will only see a minimal increase in their monthly payments unless a particular graduate borrowed larger amounts.

"A potential Fed rate increase of 0.25 percent wouldn't have much of an impact on the monthly payment for the average student loan borrower," said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.

%VIRTUAL-pullquote-Students do not react to rate changes the way auto or homebuyers might, because their needs are more static.%The interest rates of federal student loans don't change during the duration of a loan. Individuals who took out a private loan with a fixed interest rate won't have to worry about having to pay extra either.

Borrowers who took out a private student loan with a variable interest rate should expect an increase in rates and their monthly payment, because the variable rate is tied to the prime rate, said Jason Vasquez, a spokesman for Wells Fargo (WFC), the San Francisco-based financial institution.

Interest rate increases are never favorable for the borrower whether they are student loans or credit cards, said Raj Rajan, CEO of Ceannate, a Rolling Meadows, Illinois, company that works with the U.S. Department of Education on student loan and default issues. Graduates can look into plans which offer a reduction in monthly payment amounts, he said.

"Students do not react to rate changes the way auto or homebuyers might, because their needs are more static," he said.

Refinancing Loans

Refinancing current student loans is another option since the amount students are borrowing to pay for their four-year undergraduate college degrees in escalating across all income groups. The current low interest rates are also an advantage for graduates considering refinancing.

Many private lenders including Wells Fargo also offer modification programs based on employment status, salary amount or other variables, said Vasquez. "Wells Fargo customers who find themselves having difficulty making their monthly payments as a result of the change in the interest rate can contact us to see if they qualify for the modification program," he said. Private student loan lenders determine the interest rate a borrower will pay based on his credit score, said Andrew Hopkins, vice president of Discover Student Loans, based in Riverwoods, Illinois. Although variable rates can be a good option, because the rates are lower than fixed ones, they tend to rise during the term of the loan.

"Unlike federal student loans, the interest rate is not the same for every borrower," he said. "Students applying with a creditworthy cosigner may receive a lower interest rate."

The variable rates for Discover's range from 2.99 percent APR to 9.12 percent APR or the three-month Libor plus 2.62 percent to the three-month Libor plus 8.74 percent. The unknown factor with variable rates is that the three-month Libor rate could increase due to market condition, Hopkins said.

Advantages of Fixed Rate Loans

The fixed rates at Discover range from 5.99 percent APR to 11.49 percent APR, also depending on the credit score of the borrower.

Fixed rate loans give borrowers "a sense of stability" because the monthly payment amount is never altered unless the individual choses a period of deferment or forbearance, he said.

Benefits of Variable Rates

The advantage of variable interest rates is that they start lower than fixed interest rates, but the majority are likely to increase over the life of the loan, Hopkins said.

"While a variable rate loan can help save money as rates drop, the reverse is possible when market conditions send the prime rate up," said McClary. "Variable rate student loans are considered most beneficial to consumers when the trend indicates decreasing interest rates while fixed rate loans are the preferred option when rates are on the increase."
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