What Happens To Student Loans When the Fed Raises Rates

The Federal Reserve has finally increased it interest rates, but there won't be dramatic changes to student loans, according to reports.

According to Forbes, a Fed rate hike will not affect most borrowers' student loan rates because the student loans made since July 2006 have fixed interest rates. However, those who have paid out their student loans before July 1, 2006 have variable rates, which means interest rates depend on the market benchmark rate.

Federal student loan variable rates are based on the 91-day Treasury bills formula during the auction before June 1 every year. This means a lot of people who borrowed from private lenders will see their student loan rates increase after the Fed rate hike. That is because they opted for student loans that have variable rates.

Market Watch wrote that the most influential benchmark followed by private variable rate for student loans is the London Interbank Offered Rate (LIBOR). The Fed doesn't have power over LIBOR, but it does have a big influence over it. This means, when the Federal Reserve increases interest rates, so does LIBOR.

"A rate hike will mean higher earnings on savings and higher interest charges on loans - however expected changes have already been accounted for in most loans," says Sean McQuay of NerdWallet in a report by Time. "As a result, mortgage, student, and auto loan rates should remain largely the same."

Borrowers who refinanced their federal fixed-rate loans into private loans that have variable rates may see a slight bump in their interest rates. However, the impact is not expected to be that great since lenders have already been anticipating the fed to raise interest rates for some time.

This September, Federal Reserve Head Janet Yellen said that the fed is expected to increase rates at a gradual pace over the years to come. That will give borrowers enough time to think about their options and refinance their loans to suit their needs.