CHICAGO — Jan. 20, 2022 — (Newswire.com)
Consumers fear inflation because its most obvious effect is that prices go up. There’s more to it than that. Inflation also lowers the value of currency, usually leading to increases in wages and minimizing the impact of fixed-rate debt. For those with outstanding student loans, inflation can be either negative or positive depending on the structure of your loans.
Before you consolidate and refinance student loans, it’s important to understand the impact 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 past 12 months. Interest rates remain low, but the Federal Reserve Bank (Fed) has said it will raise them in 2022.
To partially offset this, wages are also rising, with 21 states raising their minimum wages earlier in the year, causing a ripple effect across multiple industries. In summary, consumers are faced with higher prices, higher wages and interest rates that are set to increase in the coming months. Here’s how it affects student loan borrowers.
Scenario #1: Student loan with variable interest rate
This group is most affected by inflation. An adjustable-rate student loan means your monthly loan payments will increase as interest rates rise. The Fed has announced that there could be up to three rate hikes in 2022. That variable interest rate, which was beneficial to you while interest rates remained near zero, will soon become a liability.
The most obvious solution to this is to refinance your adjustable-rate loan into a fixed-rate loan before the first rate hike, which is expected to happen in March, takes effect. Borrowers can do this as a standalone action on just the loan, or as part of a debt consolidation strategy that includes paying down high-yield credit card debt.
Scenario #2: Fixed Rate Student Loans
Having a fixed rate student loan right now is beneficial in times of inflation. Prices go up, but so do wages, giving you more cash to work with. In the meantime, your monthly fixed-rate loan payment will remain the same, protected from any rate hikes the Fed might introduce later this year. Your best bet might be not to change anything.
An exception to this is refinancing at a lower fixed interest rate. Now is a good time to start buying in installments if your loan is several years old and you haven’t looked at interest rates since you took it out. Prices are still historically low and there could be a better deal. Talk to your local bank, credit union, or search for an online lender that does student loan refinance.
Bottom line: It’s time to review your student loans
Inflation will persist as the world slowly recovers from the economic devastation of the pandemic. Check your student loans and any other debt you currently hold. Eliminate adjustable rate loans and credit accounts when you can as interest rates rise. If possible, refinance at lower fixed interest rates. Do not wait. Now it’s time to get this done.
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Credello: How to make your student loans inflation-proof
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