For the last several years, the Federal Reserve has kept interest rates low. In 2022, the Federal Reserve indicated that it may raise interest rates up to three times to combat inflation. Generally, when the Federal Reserve hikes interest rates, the cost of borrowing increases. This means that your mortgage, for example, could become more expensive. While debt become more expensive to borrow, savers can earn a higher return on the money in their bank account. Specifically, the Federal Reserve changes the federal funds rate, which is the rate that financial institutions charge each other to borrow money overnight. The change in the federal funds rate impacts the interest rate you pay on your credit card debt or the funds you earn in your savings account.
If you have student loans, then they may become more expensive if the Federal Reserve raises interest rates. However, before you start to panic, it’s important to understand the details. The good news is that if you currently have federal student loans, an increase in interest rates won’t affect your student loans. Why? Federal student loans have fixed interest rates, which means no matter how much interest rates change, you will always have the same interest rate for the life of your student loans. That said, if you have federal student loans issued before July 1, 2006, then you may have a variable interest rate student loan. In this case, if interest rates increase, your variable interest rate will increase, and your student loans would become more expensive.