Student Loan Refinancing
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Student Loan Refinance 101
Student Loan Glossary
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Student loan refinance interest rates hit a record low in 2021, thanks in part to the Federal Reserve slashing its interest rate to near zero at the beginning of the coronavirus pandemic.
But according to recent reports, the “Fed” plans to begin raising interest rates in 2022, which can impact interest rates on new refinance loans and existing refinance loans with a variable interest rate.
If you want to better understand how the Fed increasing interest rates can impact you, here’s everything you need to know.
The Fed is a nickname for the Federal Reserve, which is the central bank for the United States. It’s made up of 12 regional Federal Reserve banks that serve different geographic regions in the U.S., and it provides a lot of services for the country, including:
The Federal Reserve was created in 1913 after the Panic of 1907, the first global financial crisis of the 20th century. Today, the Fed is guided by its Board of Governors, which is composed of seven members.
One way the Federal Reserve helps manage inflation and maintain financial stability for the country is by adjusting its federal funds rate.
The federal funds rate is the interest rate at which banks borrow from and lend to each other on an overnight basis to meet cash reserve requirements set by federal regulators. This interest rate is closely linked to what’s called the “prime rate,” which is what banks, credit unions and other lenders use to calculate short-term interest rates.
When the Fed cut its interest rate to near zero in March 2020, interest rates for certain loans, including private student loans and student loan refinance options, and credit cards followed suit.
The decision for the Fed increasing interest rates is determined by the Federal Open Market Committee (FOMC), which is made up of the seven members of the Board of Governors and five of the 12 Federal Reserve bank presidents.
The FOMC meets eight times a year to summarize its economic outlook for the U.S., as well as policy decisions. One of those decisions may be to raise or lower the federal funds rate.
The decision for determining what the interest rate should be is based on the economic outlook of the committee and whether it needs to make changes to the rate to influence economic growth.
For example, when the coronavirus pandemic hit the U.S., the economy came screeching to a halt. Tens of millions of workers applied for unemployment benefits, and hundreds of thousands of small businesses closed for good.
As a result, the Fed slashed its interest rate to near zero for the first time ever to help encourage economic growth. When the federal funds rate and, therefore, lender rates are low, consumers are more likely to borrow money, increase spending and engage in other economic activity to help boost inflation and the economy.
When inflation starts to get out of control, the Fed increasing rates may result in less borrowing and lower spending, which can help keep inflation within certain bounds.
So if the question is how exactly the Fed calculates its interest rate, the answer is: it’s complicated.
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During its September meeting, the FOMC announced that it would hold its target range of 0% to 0.25% for the federal funds rate, but many Fed officials said they expect that the committee will raise interest rates sometime in 2022. Earlier this year in March, most officials believed the committee wouldn’t make any changes until 2024.
This decision to move up the date for the Fed increasing interest rates is largely due to recent inflation. The Fed keeps an eye on various inflation indicators, such as the Consumer Price Index and the Producer Price Index, to understand the overall health of the economy.
While inflation can be a good thing because it signals a strong economy, inflation that increases too quickly could have the opposite effect and throw the country into an economic spiral.
The annual inflation rate has been 5% or higher from May through September, according to Trading Economics. In contrast, the inflation rate was just 1.2% in 2020.
By increasing the federal funds rate, the Fed may succeed in helping slow the growth in the economy’s inflation rate, which could help slow the rise in the cost of consumer goods and other products and services.
It’s still unclear if the Fed increasing rates will happen in 2022 and what that might look like. While officials and experts can speculate on what they believe the FOMC might do, we won’t actually know what will happen until it happens.
Some, for instance, have guessed that the Fed might increase interest rates more than once. In one CNBC article, the director of rates at Wells Fargo stated that the company had priced in 0.58% in rate hikes in its expectations for the stock market.
But again, there’s no way to tell for sure until we hear it from the Fed.
If the Fed decides to increase interest rates next year, it may or may not have an impact on your student loans. Here are a few different scenarios and how it might impact you.
If you’re still in school, you’ll likely need to take out student loans at some point before you graduate. If you only borrow federal student loans, the Fed increasing rates likely won’t impact you. Congress sets the interest rates for federal student loans, and the legislative body typically uses the 10-year Treasury note to determine the annual rate.
That said, if you might need private student loans at some point in the future, the Fed raising rates could result in those rates being higher than if you were to apply for the loan right now.
If you or your child has graduated from college and your student loan interest rates are all fixed, the federal funds rate will have no impact on your current loans. Because you chose fixed-rate loans, they truly stay fixed for the life of the loan.
Variable interest rates may be tempting because they typically start out lower than fixed interest rates. But over time, they can increase as the prime rate increases — and you’ll remember that this rate is influenced by the federal funds rate.
As a result, if the Fed hikes its interest rate, you’ll likely see an increase in your rate as well, which will also increase your monthly payment.
Keep in mind, though, that lenders typically set limits on how much your interest rate can go up in a year and overall. But if you have variable-rate loans, it’s definitely worth thinking about refinancing your debt and converting it to a fixed-rate loan.
Regardless of the type of loan and interest rate you have now, if you’re thinking about refinancing, it may be a good idea to start the process sooner rather than later. Even without a change in the federal funds rate, student loan refinance interest rates have been creeping up throughout the year.
If you wait too long, it’ll be more difficult to get a loan with a low enough interest rate to make refinancing worth your while. Even if you do still qualify for a lower rate than you have now, you may be leaving savings on the table by waiting.
There are a lot of factors that go into determining an interest rate on a student loan refinance. One of those factors is the prime rate that lenders use as a benchmark to determine their interest rates.
If the prime rate indeed goes up in 2022 in response to the Fed increasing its federal funds rate, then you can expect student loan refinance rates to also increase. It may not necessarily increase at the same rate as the Fed’s interest rate, so there’s still a measure of uncertainty.
But again, if you’ve recently been thinking about refinancing your student loans, then it might be worth it to think about pulling the trigger on applying in the near future.
There are good reasons to consider refinancing your student loans, but there are also good reasons to think twice before you go down that path. Here are some of the biggest benefits of refinancing your student debt:
You may also be wondering if you should hold off on refinancing in the event that President Joe Biden offers broad student loan forgiveness.
The president proposed to offer $10,000 in forgiveness across the board as part of his coronavirus stimulus package, but it didn’t happen. The president even instructed his Education Secretary to prepare a memo to discuss his legal options as the chief executive, but the White House has yet to provide any information about what was in the memo several months later.
So while widespread forgiveness may not necessarily be completely out of the question, it may not be worth it to make significant financial decisions based on something so uncertain.
Student loan refinancing combines your current loans into a single loan with a new rate and term. See how much you can save by entering your loan information below, or by getting quotes from multiple lenders using Purefy’s rate comparison tool.
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While student loan refinance interest rates have increased since the beginning of the year, they’re still near their all-time lows, so now is an excellent time to consider refinancing your student debt.
Here are some steps you can take to get the process going and to ensure that you find the best deal:
Shopping around and comparing quotes is the best way to secure a low interest rate on your refinance loan. However, taking the time to get prequalified with each individual lender can be time-consuming, and it can be frustrating having to enter the same information over and over again.
Fortunately, there’s a way to compare multiple lenders side by side with just one prequalification tool. The Purefy Compare Rates tool allows you to view multiple loan offers based on your credit profile to help you make the best decision about your student loans.
As you go through the process, make sure you’re comparing apples to apples. Remember, variable interest rates typically start out lower than fixed interest rates, so they’re appealing. But if you pick a variable rate and market rates increase, you may end up paying more in the long run.
Also, make sure you visit each lender’s website to get more information about what they offer in terms of features and benefits. This can give you a better idea of which lender is the right one for you, especially if a lot of your rate quotes are similar.
Finally, don’t forget that prequalification typically only requires a soft credit check, so none of this will impact your credit score in any way. Once you submit an official loan application, though, there will be a hard credit check involved.
The Fed increasing rates in 2022 can have an impact on you if you’re currently a college student or a graduate or parent with variable-rate loans. What’s more, if you think you might ever consider refinancing your loans, an increase in the federal funds rate will make it more difficult for you to maximize your savings.
As a result, it’s a good idea to at least do some due diligence on whether refinancing is right for you and how much it can save you. As you compare your options, use a student loan refinancing calculator to get an idea of how much you can actually save based on your current loans and eligibility.
While there’s no guarantee that refinancing will save you money or work for you in the long run, the important thing is to take the time to research how to best tackle your student loan debt. Even if you decide not to refinance, you’ll likely learn enough to make the decisions you need to make the most of your student loans.
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