Credello: How to Inflation-Proof Your Student Loans

Consumers dread inflation because its most obvious effect is that prices go up. There's more to it than that. Inflation also brings the value of the currency down, typically causes wages to increase, and minimizes the impact of fixed interest debt. For individuals with student loans outstanding, 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 effects of inflation. According to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS) in early December, prices were up 6.8% over the previous 12 months. Interest rates remain low, but the Federal Reserve Bank (Fed) has indicated they will raise them in 2022. 

To offset some of this, wages are also up, with 21 states raising their minimum wages at the beginning of the year causing a ripple effect across multiple industries. To summarize, consumers are facing higher prices, increased wages, and interest rates that are going to go up over the next few months. Here's how that affects student loan 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 go up, your monthly loan payments will increase. The Fed has announced that there could be as many as three interest hikes in 2022. That variable rate that has been beneficial to you while interest rates remained near zero is about to become a liability. 

The most obvious solution to this is to refinance your variable rate loan into a fixed rate loan before the first interest rate hike takes effect, which is expected to be in March. Borrowers can do this as a single action 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 during an inflationary period. Prices are going up, but so are wages, giving you more available cash to work with. Meanwhile, your fixed rate monthly loan payment remains the same, protected from any interest hikes the Fed may initiate later this year. Your best bet might be to not change anything. 

An exception to this is refinancing for a lower fixed rate. Now is a good time to go rate shopping 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. Speak with your local bank, credit union, or search for an online lender that does student loan refinancing.  

The Bottom Line: 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're currently holding. Eliminate variable interest loans and credit accounts if you can because interest rates are going up. Refinance for lower fixed rates if possible. Don't wait. Now is the time to get this done.   

Source: Credello

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Categories: Personal and Family Finances

Tags: Inflation, Personal Finance, Student Loans


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