Rate Increase and Your Student Loan


  1. If you have a variable rate student loan, then your loan may be affected by a rate change.
  2. If you have a variable rate loan, you need to read the fine print of your loan documents to understand how fast, and how high, your monthly payments could increase.

The Federal Reserve just increased a key rate last week for the first time in nine years.  If you have student loans with variable rates, you may see increases in your monthly payments starting in January.

What does a Federal Reserve interest rate increase mean?

When the Federal Reserve has an interest rate change, your interest rate on your loan is not directly impacted.  However, your variable rate loan has what is referred to as a reference rate (you can find the reference rate in your loan documents).  The reference rate, such as LIBOR or the Treasury Rate, tends to directionally follow the Federal Fund Rate.  Simply put, if the Federal Fund Rate increases, your variable interest rate will most likely increase as well.

If you do not know already, you should look up what your reference rate is and how often it can be increased.  Variable rate loans can adjust monthly, quarterly, semi-annually, or annually.  Knowing when your payments may change is a valuable piece of information when it comes to financial planning… nobody likes surprises.

What does this mean to my payments?

If you have a variable rate loan, then you are making payments in one of two ways:

  1. You are either making required monthly payments; or
  2. You are making your required monthly payments and prepaying a part of the loan each month.

If you are only making your required monthly payments:

Your monthly payments will increase.

How much?  It depends on the amount borrowed, your term, and how quickly rates rise.  Many variable rate loans that have a ten year term are currently at 3.0% and the most they can increase is up to 9.0%.

On a $10,000 loan at 3.0%, your monthly payment is $96.56 and you would pay a total of $11,587.29 over the life of the loan, all else equal.

On an equivalent loan at 9.0%, your monthly payment would be $126.68 and you would pay a total of $15,201.09.  The difference in cumulative payments between the two loans is $3,613.80.  That is over a 30% difference! The difference in the two cumulative payments is how much it could cost you.  In short, it would cost you between $0.00 (if rates stayed exactly the same for ten years) and $3,613.80 if rates increased to the cap tomorrow (which is not likely).

If you are making your required monthly payments and prepaying your loan:

This scenario can be split into two further scenarios:

  1. Interest rates can rise to a certain point and your payment, in absolute dollars, would not be affected.  What would be affected is how much of your payment is going to pay down principal and how much is paid to interest.  In this case, it will take you longer to pay off your loan than you originally thought because an increased portion of each payment will be used towards interest payments.
  2. If interest rates rise past a certain point, your monthly payments will still go up and it will take you longer to pay off the loan than you originally thought.  That “certain point,” or the “wtf point” as my friends call it, varies for each person based on his or her loan and how much he or she is prepaying.

Should I keep my variable rate loan?

Simple answer: it depends.  Every finance product has a purpose.  If used properly, they can be effective tools.  When used improperly, they can wreak havoc on your finances.  Just ask the people who used variable rate loans to finance their homes in 2005 and couldn’t afford their mortgage payments as their payments increased.

There are some general rules we can share with you of when variable rate loans are good to use:

  1. You have a shorter loan term, which limits the effect of interest rate increases;
  2. An increase in your payments does not affect you financially (i.e., your level of earnings is high enough such that a payment increase doesn’t impact you in a meaningful way); or
  3. You believe interest rates will decrease or stay flat in the near-term.

We believe you have a better option…

At FitBUX, we offer a hybrid income share agreement. This means that your payments are based on a percentage of your income and does not fluctuate based on bankers or the Federal Reserve.  They fluctuate with your income: If you earn less, you repay less monthly; if you earn more, you repay faster.

In other words, we’re providing an unmatched level of flexibility that is linked to your personal situation, not outside elements outside of your control. We think it just makes sense.

To apply to be part of our trial program and get $150 when you’re approved for refinancing, click here

For further reading about how income share agreements differ than variable rate loans, see our recent article.

As always, please share this article with anybody you think it may help and please do not hesitate to contact us with questions.

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