The basics

The Federal Reserve has announced that starting July 1, 2022, interest rates on consumer loans are going up to combat inflation. Consumer loans are a broad category of loans that can include mortgages, auto loans, education loans, personal loans, and credit cards. These loans will increase by 1.26 percentage points, which equates to a 34% increase in undergraduate loans. If you are a borrower that is worried about these rates going up, you can look into consolidation loans, which can help consolidate multiple federal loans into one.

The numbers

  • Undergrad loans
    • From 3.73% to 4.99%
  • Graduate loans
    • 28% to 6.54%
  • PLUS loans
    • 28% to 7.54%

There are caps on how high interest rates can get on these loans set by Congress, but the caps are much higher than the current rates. Undergrad loans cannot have rates that exceed 8.25%, which is almost double the current rate. As inflation continues out of control, it can be nerve wracking for borrowers that the rates can get even higher. Although it is important to combat inflation, it is unclear as to whether placing that burden on student loan borrowers is the right answer.

Who gets impacted

If you have graduated from college and not taking out new loans, your interest rate has been locked in for these federal student loans. Student loan repayment is expected to begin sometime at the end of the summer, with many advocating for President Biden to cancel some or all of borrowers’ debts. However, this massive spike in student loan rates will impact students taking out loans for the fall semester. It is important to note that the Federal Reserve only sets rates for federal student loans, while private lenders set their own rates.

Due to the fact that federal loans have fixed interest rates, any new student loans taken out between July 1, 2022 and June 30, 2023 will have this increased interest rate for the life of the loan, regardless if it drops in the future once inflation decreases. This is somber news for everyone, as student loan debt is already crushing millions of Americans.

New borrowers working on their education will be stuck with these sky high rates for the lifetime of the loan, making it even more difficult to pay back. The best option for these borrowers that want to reduce their interest rate in the future would be to refinance the loan, but that requires good credit and stable income, which can be hard in a difficult economy.

The bottom line

Paying off student debt can be difficult and take years to accomplish. A Direct Consolidation Loan can allow you to combine multiple federal student loans into one with only one monthly payment. If you are looking for consolidation loans, check out Credello’s tool to find and compare options. Consolidation loans can lower interest rates and provide various forgiveness options depending on the loan.