The most recent Consumer Price Index (CPI) report from the Bureau of Labor Statistics showed that, through July of 2022, year-over-year inflation increased 8.5%.
That said, most of us don’t need the government to tell us 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 head to the store to stock up on food and supplies.
But how does inflation impact student loan debt?
At the end of the day, the pros and cons of repaying student loan debt during times of inflation depend on who you ask. Some experts say inflation is damaging no matter what, yet others say inflation can be a good thing when it comes to paying off student loans.
Ultimately, how inflation affects your student loan repayment plans will depend on your specific situation, including how much debt you have, your current interest rate, and other details. However, I reached out to some experts to find out their thoughts on this important topic, and here’s what they said.
Holders Of Fixed-Rate Student Loans Will Benefit
According to Dr. Jaime Peters, who serves as the Assistant Dean and Assistant Professor of Finance at Maryville University, student loans with fixed interest rates can be a great deal during times of inflation. This is based on the fact current federal student loan interest rates are below the most recent measure of inflation, she says.
As a result, the borrower will pay back their loan in less valuable dollars in the future, which can help them save money over the long-term in a roundabout way.
“It is a hidden discount,” says Peters.
As an example, let’s say you took out federal student loans for an undergraduate degree during the 2020-21 academic year — a year when interest rates were set at 2.75% for this type of loan.
In this case, you would pay back your student loan debt at 2.75% for the duration of your loan repayment period no matter how long. Even ten years later when inflation has caused your salary to surge, the monthly payments on fixed-rate student loans will stay the same.
New Students Face A Double-Whammy
Of course, fixed rate loans from the last few years are a better deal than loans that will be taken out this year. In fact, federal student loans taken out for the 2022-23 academic year come with exceptionally high rates —4.99% for undergrad, 6.54% for graduate direct unsubsidized loans, and 7.54% for PLUS loans.
Unfortunately, this means borrowers taking out federal student loans this year are being hit in every direction. They’re going to pay higher fixed interest rates when they eventually begin repaying their student loans, but they’re also paying more for food, housing, and all their regular bills.
Financial advisor Daniel J. Milan of Cornerstone Financial Services agrees that inflation decreases the purchasing power of individuals regardless of their student loan debt status. Unfortunately, this means today’s borrowers are facing rising prices when it comes to eventually servicing their debt on top of everything else.
“So, if other costs are increasing, then that means the borrower may feel more stress when it comes to maintaining their student loan payments.”
Rising Wages Can Make Repayment Easier In The Future
James Anderson, who is the Director of Financial Aid at Montclair State University, pointed out another way inflation can be a boon for borrowers who have to repay their student loans either way — through higher wages.
In periods of high inflation, he says, it is not unusual for salaries to increase to keep pace. Not only that, but many industries are paying more than ever right now in order to recruit qualified talent within a number of fields.
“If an individual has fixed rate loans and earns a higher salary, they may be better equipped to make payments on their student loan,” says Anderson.
Even so, he said you cannot deny that higher prices for other commodities, such as food, rent and transportation, may offset that advantage.
Variable Rate Loans Can Sting Right Now
Finally, Dr. Peters says inflation can be painful for borrowers who have a variable interest rate, mostly because the Fed has raised interest rates several times this year in order to combat its impact. However, it’s important to know that we’re only talking about variable rates on private student loans since federal student loans all come with fixed interest rates that never change.
For those who have private student loans with variable rates, rising interest rates caused by inflation will cause interest charges to surge significantly over their repayment term.
Even worse, those stuck with variable rates will “see their required payments increase at the same time as they are fighting to keep up with gas, grocery and housing price increases,” says Dr. Peters.
The pain may not even be over yet, either. If the Fed raises interest rates again later this year or into next year, the interest rates on variable student loans will go up yet again.
The Bottom Line
When it comes to student loans and inflation, it’s nothing short of a mixed bag. Yes, having fixed interest rates can help you pay back your loans with fewer real dollars over time when inflation is high. However, the cost of everything else is going up at the same time.
With all this in mind, what’s really important is what you are doing to deal with student loan debt in light of inflation. Whether the current pause on federal student loan interest rates is extended again or you have private student loans you’re 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 if you can afford to can help you minimize interest charges no matter your rate. In the meantime, you can always look into refinancing your student loans to see if you can get a better deal.
Inflation or not, we’re all on the hook for the student loans we took out. It’s up to us to craft a plan that gets us out of debt as quickly — and cheaply — as possible.
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