Inflation and Student Loans: A Good Combination? -Forbes | Vette Leader

The latest Bureau of Labor Statistics Consumer Price Index (CPI) report showed that inflation rose 8.5% year-on-year through July 2022.

That said, most of us don’t need the government to tell us that inflation has been absolutely brutal this year. We see it every time we fill up our tanks at the pump, go out to dinner with our families, or go to the store to stock up on groceries and supplies.

But how does inflation affect student loan debt?

Ultimately, the pros and cons of paying off student loan debt during inflation depends on who you ask. Some experts say inflation is always harmful, while others say inflation can be a good thing when it comes to paying off student loans.

Finally, how does inflation play out your Student loan repayment schedules depend on your specific situation, including how much you owe, your current interest rate, and other details. However, I reached out to a few experts to get their opinions on this important topic, and here’s what they said.

Fixed rate student loan holders will benefit

according to dr Jaime Peters, who serves as an assistant dean and assistant professor of finance at Maryville University, fixed-rate student loans can be very affordable in times of inflation. This is based on the fact that current federal rates on student loans are below the most recent measure of inflation, she says.

As a result, the borrower repays their loan with less valuable dollars in the future, which can help them save money in the long run in a roundabout way.

“It’s a hidden discount,” says Peters.

As an example, let’s say you took out federal student loans for a bachelor’s degree in the 2020-21 academic year — a year in which interest rates on this type of loan were set at 2.75%.

In this case, you would pay off your student loan debt at 2.75% for the duration of your loan repayment period, no matter how long. Even ten years later, when your salary has skyrocketed due to inflation, the monthly payments on the fixed rate loan remain the same.

New students face a double whammy

Of course, fixed-rate loans from the last few years are a better deal than loans taken this year. In fact, federal student loans borrowed for the 2022-23 academic year come at exceptionally high rates — 4.99% for undergrad, 6.54% for direct, unsubsidized graduate loans, and 7.54% for PLUS loans.

Unfortunately, that means borrowers taking out federal student loans this year will be hit in all directions. They’ll pay higher fixed interest rates when they eventually start paying off their student loans, but they’ll also pay more for food, housing, and all of their regular bills.

Financial advisor Daniel J. Milan of Cornerstone Financial Services agrees that inflation reduces the purchasing power of individuals, regardless of their student loan debt status. Unfortunately, this means that today’s borrowers face rising prices when it comes to ultimately servicing their debtt on top everything else.

“So if other costs are going up, that means the borrower may feel more stress in trying to keep their student loan payments going.”

Increasing wages may make repayment easier in the future

James Anderson, director of financial aid at Montclair State University, pointed out another way inflation can be a boon to borrowers who have to pay off their student loans one way or another — through higher wages.

In times of high inflation, it is not uncommon for wages to rise to keep up. Additionally, many industries are now paying more than ever to recruit skilled talent across a range of fields.

“If a person has fixed-rate loans and earns a higher salary, they may be better equipped to make payments on their student loan,” Anderson says.

Even so, he said there could be no denying that higher prices on other commodities, such as food, rent and transportation, could offset this benefit.

Adjustable rate loans can now sting

Finally says Dr. Peters that inflation can be painful for adjustable rate borrowers, especially since the Fed has hiked interest rates several times this year to combat its impact. However, it’s important to realize that we’re only talking about variable interest rates for private student loans, since federal student loans all come with fixed interest rates that never change.

For those who have variable rate personal student loans, the rising interest rates caused by inflation will cause interest costs to increase significantly during their repayment period.

Worse still, those who stick to variable interest rates “are seeing their required payments increasing as they struggle to keep up with increases in the price of gas, groceries and housing,” says Dr. peters

The pain may not even be over yet. If the Fed hikes rates again later this year or next, interest rates on variable student loans will rise again.

The final result

When it comes to student loans and inflation, it’s nothing short of a mixed bag. Yes, fixed interest rates can help you pay off your loans over time with fewer real dollars when inflation is high. At the same time, however, the costs of everything else are increasing.

With all of that in mind, what really matters is what she do to deal with student loan debt in the face of inflation. Whether the current federal student loan interest break is extended again or you have private student loans that you are currently paying off, there are steps you can take to save money along the way.

For example, paying more than the minimum payment on your loans when you can afford it can help minimize interest costs regardless of your interest rate. In the meantime, you can always try refinancing your student loans to see if you can get a better deal.

Inflation or not, we’re all hooked on the student loans we’ve taken out. It’s up to us to come up with a plan that will get us out of debt as quickly – and cheaply – as possible.

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