If you have recently heard that the federal government is increasing the interest rate on student loans, then you heard right. It is going to happen. While you may be panicking right now, especially if you are barely able to make your payments, take a step back and take a deep breath. We are going to discuss exactly what you can expect, exactly what is happening, and what you can do to make the transition easier on yourself.

Will It Affect You?

Believe it or not, this is the first rate increase the federal government has agreed on and is enacting since 2006! Yes, 16 years! As we mentioned above, you should take a deep breath. The rate increase is only going to affect students who have student loans that date from June 2006 or previous. Any student loan taken out July 2006 or later will NOT be affected by this increase. The reason this increase will not affect you is because you have a fixed interest rate, which means it is locked in for the life of your loan and will not change over time. Your fixed rate student loan cannot be changed even if the government does increase the rates! This is great news, huh?

Non-Fixed Rate Loans

Now, if you do not have a fixed rate loan and you are indeed on a variable rate loan, then you are affected by this increase. Ugh! All student loans prior to June of 2006 have variable interest rates, which fluctuate with any changes to the rate. Students often see a low variable rate and want to choose it because it looks low, but there is the chance that it can raise over time and result in you paying more money on your loan. A fixed rate protects you from this, so while you may be paying more at the time, you will ultimately benefit from being locked in at a single rate. Typically, you see variable interest rates with students who have a private student loan through a financial institution. This is because they mainly offer these types of loans and there is a large difference between the variable and fixed rates. Ultimately, if you have a variable rate, you will be affected.

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When Will I Pay More?

If you are thinking that your new student loan bills are going to increase immediately, they won’t. In fact, the entire process is supposed to be a transition over the next couple of years, so you likely will not even notice an increase, unless you closely watch the bill. The rate increase has been enacted to help close the gap that currently exists between fixed and variable rates.

What Should I Do?

You do not have to currently do anything right now, but there are some things that you can do, if you are worried that you may end up paying more money. One of the first things we recommend you do is start sending in a couple extra bucks per month when you pay your bill. This way, you can get used to sending in more money, that way, when the rate increase does happen, you will not feel it as much. Next, we also recommend that you begin to apply any additional money you have to your loan to start paying the principle balance down some more, that way, your payments will stay about the same. To do this, simply take either part of or all of the extra money you receive from your tax return, gifts, or employee bonuses and send them to your loan provider.

How Much Debt is Out There?

There is a lot of student loan debt out there and hopefully the rate increase will not impact too many students. As of 2016, there is roughly 1.3 trillion dollars in student loan debt sitting out there and much of that is from defaulted loans. If you find that you are having trouble paying for your student loans, you should speak with your loan service provider to discuss other repayment options that may be available to you. Additionally, there are options to reduce your interest rate through the private market via consolidating student loans; however, if you are having trouble with payments already, then those options may not be available to you. It takes a bit of reading to figure it out!