As a college student, all the talk about rising inflation might seem like a distant concern. But the current state of the economy doesn’t just affect those who have already graduated and started their careers – it has a direct impact on your student loans, living expenses and more.
That impact will vary depending on your specific situation. In the article below, we’ll break down everything you need to know about how inflation interacts with your student loans.
What is Inflation?
Inflation is defined as how the cost of goods and services changes over time. If there is negative inflation, it means that overall costs are going down. But if there is positive inflation, which is much more common, then overall costs are increasing.
Normally, inflation averages around 2-3% annually. But since the beginning of the Covid-19 pandemic, the annual rate of inflation has hit near-historic peaks. For example, in May 2022, the annual rate of inflation was 8.6% – the highest since 1981. While Covid may have started the trend of high inflation, Russia’s invasion of Ukraine and continuing supply-chain issues have also exacerbated the problem.
When inflation is high, it means the price of everyday items has gone up more than the average person’s salary. In short, you can afford to buy less this year than you could have last year.
The cost of some items has increased far more than others. For example, gas prices increased by 58.7% from December 2020 to December 2021. The cost of groceries rose 9.4% from April 2021 to April 2022.
When inflation is high, the federal government often raises interest rates to curb inflation. Unfortunately, rising interest rates can also have a negative impact on consumers.
How Inflation is Impacting Students
High inflation influences almost every aspect of life, but there are some specific ways that it can affect students.
Federal student loans
When overall market interest rates increase, interest rates on student loans often increase as well. For the 2020-21 school year, the interest rate for federal student loans was 2.75% for undergraduate students, 4.30% for graduate Direct Unsubsidized Loans and 5.30% for Direct PLUS loans.
But for the 2022-23 school year, rates will be 4.99% for undergraduate students, 6.54% for graduate Direct Unsubsidized Loans and 7.54% for Direct PLUS loans.
While that difference may seem small, it can result in students paying thousands or even tens of thousands more in total interest. For example, if you took out $10,000 at 2.75% interest with a 10-year term, you’ll pay $1,449 in total interest. But if you took out $10,000 at 4.99% with a 10-year term, you’ll pay $2,722 in total interest. That’s a difference of more than $1,273.
While you can’t change the interest rate on a federal loan, you can be mindful of how much you borrow. Try not to take out more than you absolutely need to live on. Also, take more time to apply for scholarships and grants.
Private student loans
Since the Federal Reserve has increased interest rates, private student loan companies have also increased their interest rates. If you’re taking out private loans, you may notice a higher interest rate for the 2022-23 school year than for previous years.
Students who need to take out loans should compare rates between multiple lenders to find the best deal. Also, students may want to rethink choosing a loan with a variable interest rate, which means the rate will change over the life of the loan.
Rates are likely to keep increasing in the future, and students should choose a fixed-rate loan, so their rate will be the same throughout the loan term. If rates fall in the future, borrowers can refinance to a loan with a lower rate.
If you already have a variable-rate loan, you cannot refinance it until you graduate. If possible, try to make interest-only payments on the loan to decrease the total balance.
Savings accounts
One of the few benefits of interest rates increasing is that many banks are now offering higher interest rates on savings accounts. Some banks have increased their interest rates several times already this year.
You can take advantage of higher rates by comparing the rate on your savings account to banks like Capital One, Marcus and Ally. Many of these online banks are offering rates close to 1% APY.
Look at the most recent monthly statement for your savings account and see what the interest rate is. If it’s not close to 1% APY, you should consider switching. Some banks may even offer a sign-up bonus if you open a new account.
Credit cards
College students with credit cards may have noticed that the interest rate has increased on their cards. If you always pay your credit card bill in full, then this won’t impact you. However, if you carry a balance on a card, then you may pay more interest now.
The average credit card APR is about 17% in 2022, compared to 16% a year ago. Here’s how that difference might affect you. Let’s say you have a $1,000 balance on a card with 16% APR. If you only make the minimum payment, you’ll pay $792.87 in total interest. But if the rate changes to 17% APR, then you’ll end up paying $857.52 in total interest.
If you have a credit card balance, try to pay it off faster and avoid using the card for anything other than necessities and emergencies.
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