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Tag: Student Loans
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A year on, college grads recall surprise of learning their student debt will be wiped out
A year on, college grads recall surprise of learning their student debt will be wiped out – CBS News
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What the debt ceiling deal means for the student loan payment pause
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For more than three years, tens of millions of Americans haven’t had to make federal student loan payments because of the coronavirus pandemic. Now, the deal reached to address the looming debt limit crisis guarantees the end of that payment pause. But it does not end the president’s effort to provide student loan forgiveness altogether.
In the deal negotiated between the Biden administration and House Republicans over the weekend to address the debt ceiling, officials included a provision that terminates the student loan payments pause 60 days after June 30. It also prohibits the education secretary from extending the pause on federal student loan payments without an act by Congress.
But on Tuesday, White House Office of Management and Budget Director Shalanda Young, who helped negotiate the debt ceiling deal, clarified that while the bill commits to ending the pause on student loan payments, the fate of the president’s broader student loan forgiveness plan still rests with the Supreme Court.
The payment pause was already set to expire later this summer, even without the provision in the debt ceiling deal.
The pause on payments, which also set interest rates on student loans at zero percent, has been in effect since the pandemic began in spring 2020, and affects roughly 43 million people with federal student loans. According to the Committee for a Responsible Federal Budget, the pause has cost an estimated $5 billion a month, totaling an estimated $195 billion since it began.
In November, the Education Department announced the latest extension of the student loan payment pause. It was the fifth time the Biden administration extended the pause first put in place under President Donald Trump.
At that time, the administration said the suspension of federal student loan payments would end in conjunction with the Supreme Court’s decision on the Biden administration’s broader student loan forgiveness plan. Should the plan be implemented, the pause would end sixty days after that. If the program is not implemented by June 30, the payments would resume 60 days after that. The Education Department has said it would notify borrowers before payments restart.
What the debt ceiling deal does not strike is the administration’s federal student loan forgiveness program — despite House Republican efforts.
Last year, the Biden administration announced its plan to forgive up to $10,000 in student loans for eligible borrowers earning less than $125,000 and $20,000 for eligible Pell Grant recipients. But the plan was challenged by six conservative states and two borrowers out of Texas.
The Supreme Court heard arguments on the case in February and is set to release its decision on the case any day now. During the arguments, the court’s six conservative justices raised questions about the Biden administration’s legal reasoning for the plan, signaling they may rule to block it.
“There’s nothing on that in this bill,” Young said on Monday of the forgiveness plan. She also said the debt ceiling deal protects the income-driven repayment rules, which the Biden administration proposed changes to earlier this year.
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After the pause: This is how borrowers are preparing for resumption of student-debt payments
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She doesn’t know how much her student-loan bill will be when the years-long pandemic-era freeze on payments ends. Eminger’s loans were transferred during the pandemic to a new servicer, but she’s struggled to communicate with the organization, which could help her learn her monthly payment amount. She’s also rushing to take steps that could provide her access to a loan-forgiveness program for public servants.
“I am very nervous about them starting again,” Eminger, 37, who has about $175,000 in student debt, said of the loan payments. “There’s just a lot of uncertainty and murkiness around it, which for a loan amount of my size is pretty scary.”
After a more than three-year freeze, payments, collections and interest are scheduled to resume on federal student loans later this year. This is the ninth time — spanning two administrations — that the government has threatened to turn payments back on. Once again, borrowers, advocates and servicers are gearing up for a financial and operational headache.
“It’s going to be frustrating for everybody involved — borrowers, servicers, the Department of Education, advocacy organizations like ours,” said Betsy Mayotte, the president of the Institute of Student Loan Advisors, a nonprofit that helps borrowers manage their student loans.
To advocates who pushed officials to delay restarting payments in the past, this moment in many ways looks similar to the months before the freeze was scheduled to end those eight other times. A challenging economy means borrowers’ budgets are still tight and promised fixes to the student-loan system that could help ensure a smooth transition to repayment and make borrowers’ bills more manageable still haven’t materialized.
But a few key factors are different, some of which are upping the pressure on the Biden administration to turn the student-loan system back on: the official end to the pandemic emergency, congressional Republicans taking aim at the payment pause in two pieces of legislation and multiple lawsuits challenging the freeze. Other elements unique to this moment are exacerbating the uncertainty and challenges related to restarting payments. Servicers will have fewer resources than in the past to handle a likely crush of calls.
“The Department remains focused on doing everything in its power to better serve students and borrowers, and we are fully committed to supporting student loan borrowers as they successfully navigate returning to repayment,” a Department of Education spokesperson wrote in an email. “The Department is deeply concerned about the lack of adequate annual funding made available to Federal Student Aid this year,” the spokesperson said, referring to Congress’s decision not to increase funding for FSA, despite the agency’s request. “As the Department has repeatedly made clear, restarting repayment requires significant resources to avoid unnecessary harm to borrowers.”
For Eminger, and other borrowers, part of the anxiety surrounding the restart to payments stems from major upheaval to the student-loan system that’s been announced during the pause that will make her loans more manageable. But accessing these benefits requires both diligence — staying on top of announcements and paperwork — and patience while she and others wait for the full implementation of these initiatives.
“The rules have been changing so much,” Eminger said. “Before the pandemic I felt like I very much understood what I was required to do. I always felt very on top of it. Now it just feels like a completely moving target.”
Kate Eminger says she’s nervous about the looming resumption of student-loan payments.
Courtesy of Kate Eminger
Compounding her uncertainty is a lack of clarity surrounding exactly when payments will resume. In November, President Joe Biden told borrowers they could expect the pause to end in the late summer, but he didn’t give an exact date. In addition, it’s hard for Eminger to see how this deadline for payments to restart is different from all the others, where student-loan bills never materialized. All of that has made it difficult for Eminger to figure out exactly when to take steps to make sure her student-loan payment can fit in with the rest of her budget such as the sale of her car.
“It does not feel real at all,” she said of the restart of student-loan payments. “It would be great to name a date. If they could name a date and if that date felt certain then you could plan.”
Tied up in court
The Biden administration has said that the freeze will end 60 days after litigation surrounding its plan to cancel up to $20,000 in debt for a wide swath of borrowers is resolved or 60 days after June 30, 2023, whichever comes first.
“When payments turn back on, it’s going to be a big problem,” said Eleni Schirmer, a researcher and organizer with the Debt Collective, a debtor activist group, “but to not even be granted the dignity of a clear date of when that happens just makes it even more of a problem.” She described providing a ballpark estimate for the restart of payments instead of an exact date as signaling an “almost cruel indifference” to how resumed monthly student-loan bills will impact borrowers.
That uncertainty could exacerbate the stress that student debt already places on borrowers, according to Daniel A. Collier, an assistant professor of higher education at the University of Memphis, who is studying the impact of student debt on mental health. What he’s found is that people who are the most uncertain about what’s going on with their student loan have the highest rates of psychological distress and suicidal ideation. For example, these borrowers worry they’re not getting an accurate sense of their balance or the number of payments they need to make before qualifying for a forgiveness plan.
“People are concerned about the pause because they don’t know what a restart looks like, this has never been done before,” he said. In the past, when payments have resumed after more limited pauses, delinquencies and defaults spiked — part of the Biden administration’s legal rationale for tying mass debt cancellation to the restart of payments. Borrowers don’t know “when it’s going to start, what their repayments are actually going to be,” Collier added.
Kevin Noonan, who together with his wife has about $100,000 in student debt, said he’s benefited from the pause. The couple has used the extra room in their budget to pay down private student loans. Still, Noonan is “frustrated” with the lack of clarity surrounding the resumed payments and the status of the Biden administration’s loan-forgiveness plan.
“Not knowing is the hardest part,” he said. “I have a Google alert set up, every time student loans come up I check everything. You kind of just have to plan for the worst-case scenario.”
Megan and Kevin Noonan have about $100,000 in student debt.
Courtesy of Kevin Noonan
The decision to tie the resumption of payments to the court’s decision “added an element of unpredictability,” said Persis Yu, managing counsel and deputy executive director at the Student Borrower Protection Center, an advocacy group.
“There’s the choice to not land on a certain date, but there’s also the choice of 60 days,” Yu said, referring to the 60-day delay between the court’s decision and payments resuming.
“I really wonder whether or not 60 days is enough time for borrowers,” she said. “When we think about the amount of work that is really going to have to happen to effectively turn on this system, 60 days does not seem like a lot of lead time.”
Secretary of Education Miguel Cardona said in a congressional hearing this month that the agency is “preparing to restart repayment because the emergency period is over.” He told another congressional panel that the agency is “geared up and ready to go,” to resume payments.
Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group, said that 60 days should be enough time for student-loan servicers to implement the restart. In order to accomplish that, they’ll need to be able to communicate with borrowers in the coming weeks about the end of the payment pause and be allowed to offer flexibilities like forbearance and allowing borrowers to verbally recertify their income for payment plans.
When the end of the payment freeze loomed in the past, servicers didn’t have the go-ahead from the Department of Education to communicate with borrowers, Buchanan said. They still don’t, but servicers have been working closely with officials to discuss the “communication playbook” in recent weeks and hope to roll it out shortly.
The Department of Education “remains in constant contact with servicers,” the department spokesperson wrote in an email, and will be in “direct contact” with borrowers before the end of the payment freeze. “Engaging with servicers to ensure they are communicating directly with borrowers about successfully returning to repayment is an important part of the Department’s efforts to smoothly transition borrowers back into repayment,” the spokesperson wrote.
Still, the uncertainty surrounding exactly when payments will start could create an obstacle to a seamless return to repayment, Buchanan said.
“If you’re a family and you’re planning a budget you need to know what is the date that I need to be prepared to make this payment,” he said. “Having a fuzzy date doesn’t do anyone any good including servicers, but especially for borrowers.”
Borrowers will receive a bill at least 21 days before their payments are scheduled to resume and likely won’t end up having to make a payment until October, Politico reported last month. Officials are also considering offering borrowers a grace period when the freeze ends, according to the report.
Servicers will be implementing plans the department previously developed to restart payments, Buchanan said. But they’ll be working with fewer resources than previously anticipated. The Department of Education cut the amount it’s paying servicers to manage each account. The agency has said the cuts are due to lawmakers’ decision not to increase funding for the Office of Federal Student Aid for the 2023 fiscal year. The lack of funds will mean fewer customer-service representatives and reduced call-center hours, including none on weekends.
“What is the right level of resources? How many staff should you have? It’s not a definable thing,” Buchanan said. “What I can say is having fewer than we had before does not make it better.”
The department spokesperson said the agency will keep working with Congress to fully fund President Biden’s fiscal 2024 budget request. The department asked for a $620 million increase in funding for FSA.
“Restarting repayment requires significant resources to avoid unnecessary harm to borrowers,” the spokesperson wrote in the email.
Members of the Class of 2022 at the University of Delaware.
Mandel Ngan/Agence France-Presse/Getty Images
In addition, the Department of Education recently announced an overhaul of the student-loan servicing system aimed at increasing accountability for servicers. For years, borrowers and advocates have complained that the firms don’t provide borrowers with enough information or the right information. Without that in place, Yu worries that ensuring borrowers have a truly affordable payment will be “a nightmare.”
“At this inflection point where you need the best servicing possible, we don’t have it,” she said. “It seems irresponsible to turn on the payment system into a broken servicing system and into a broken system overall.”
Though the new servicing system won’t go live until 2024, “our servicer contracts continue to include the same requirements that all vendors effectively serve our customers and still provide that servicers compete against each other to maintain low call-abandonment rates,” the department spokesperson wrote.
Fixing servicing is just one of many initiatives from the Biden administration aimed at overhauling the student-loan system in the process of being implemented and won’t be fully realized before the end of the summer.
For example, some borrowers have debts that should be wiped off the books, Yu said. The Biden administration has launched several initiatives over the past few years aimed at making it easier for borrowers to access the forgiveness already available to them under the law. So far, the department has announced more than $66 billion in discharges for nearly 2.2 million borrowers, including public servants, borrowers with severe disabilities and borrowers who were scammed by schools.
Still, there are more borrowers eligible to have their debt canceled under these programs who haven’t received relief, Yu said. “These borrowers are going to be thrown into a system to make payments on loans they shouldn’t be making payments on anymore,” she said.
In addition, a promise to make repaying student loans more manageable hasn’t fully materialized. At the same time that President Biden announced the mass debt-cancellation plan, he also unveiled sweeping changes to the repayment system aimed at making student-loan bills more affordable. But the program, which Biden called “a game changer” when he announced it in August, likely won’t be ready by the end of the summer. It’s also been a target for criticism by conservative advocacy groups and Republican members of Congress.
“The only way that that could be available to borrowers when payments resume is with another extension,” Yu said.
The proposed plan, which the department spokesperson described as “the most affordable student loan plan in history,” builds on an existing income-driven repayment plan called REPAYE. Eligible borrowers who enroll in REPAYE now will have their monthly payments automatically updated as the terms of the new plan are “finalized and implemented, starting later this year,” the spokesperson wrote.
‘Almost like a tax increase’
For many borrowers, the financial burden of resuming student-loan payments will be significant. Thomas Simons, a senior economist at Jefferies, estimates the return to repayment will cost borrowers about $18 billion per month.
“It’s almost like a tax increase for these people,” Simons said. “They have to pay it, [and] it doesn’t get them anything tangible right now.”
The amount borrowers are saving by not making student-loan payments accounts for about 2% of discretionary spending, Simons said. He sees the hit to borrowers’ wallets as analogous to the impact of a payroll-tax increase in 2013, which impacted a smaller share of discretionary spending for a larger number of Americans.
“‘It’s almost like a tax increase for these people. They have to pay it, [and] it doesn’t get them anything tangible right now.’”
“If you look at what happened in the economy in 2013 after those tax increases were announced, the first half of the year spending decelerated quite significantly,” he said. “It really didn’t recover until the latter part of the year.”
“I would be very surprised if we don’t see a similar slowdown in spending coming out of this,” Simons added.
And if payments resume in late summer or early fall, as planned, the hits to borrowers’ bank accounts will be arriving at “the worst possible time,” Simons said, when the labor market will likely start to feel the effects of the Federal Reserve’s battle against inflation.
“That could be a double whammy where people are starting to have significant questions about their income and then having a pretty significant expense,” Simons said.
Many borrowers will likely be juggling other bills, too. For one, the costs of rent, groceries and other basic needs have risen since the advent of the coronavirus pandemic. And borrowers’ other debt payments have actually become less manageable in the three years since the freeze was first implemented.
As of September of last year, about 7% of student-loan borrowers who were not in default on their student loans at the start of the pandemic were more than 60 days delinquent on other debt, compared with 6.2% at the beginning of the pandemic, according to the Consumer Financial Protection Bureau. Their monthly payments on other credit products have also increased during the pause period — 46% of borrowers saw their monthly payments on credit cards and car loans increase by at least 10% since the start of the pandemic, the agency found.
For Kelly, a Charleston, W. Va., student-loan borrower and her husband, the freeze on student-loan payments created financial space to take care of emergency expenses, like a leaking roof. Kelly, who declined to use her last name in order to more freely discuss her financial circumstances, owes about $23,000 in student debt from studying to become a paralegal. Her husband owes about $20,000 from his nursing-school studies.
Kelly, 45, found a job in her field after graduating, but was laid off during the pandemic. She started working some side gigs and eventually launched a dog-grooming business. Despite the business’s success and her passion for it, it likely won’t be enough to cover her bills once she has to start paying on her student loan again. She’s considering getting a second job when the payment freeze ends.
“We’re dual-income, no kids. One car is paid off, the other one is modest — a Volkswagen
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” she added. “We don’t finance things, we don’t live a high and mighty life, but it seems like every month we’re budgeting to the penny.”“I don’t know how much we can cut back,” she added. “Our entertainment as it is, is Netflix
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or we go out to eat once a month or so. I guess we can cut back on that.[ad_2]
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Biden administration has canceled $66 billion in student debt. How to know if you qualify
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Rockaa | E+ | Getty Images
Although the Biden administration’s sweeping student loan forgiveness plan and the legal troubles around it have gotten the most headlines, the U.S. Department of Education has already canceled more than $66 billion in education debt under existing programs.
More than 2 million borrowers, including defrauded students and those who work in the public sector, have benefited from that relief over the last few years.
“I feel like this administration has done more for borrowers in a short period of time than any other, especially for the most vulnerable borrowers such as the disabled and victims of fraud,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.
Still, advocates are worried about the administration’s plan to soon resume federal student loan payments, which have been suspended since March 2020, without deeper debt cancellation. Even before the Covid-19 pandemic, 1 in 4 student loan borrowers were in delinquency or default.
Here’s a breakdown of the debt relief already granted — and how to know if you qualify for it.
$42 billion in debt canceled for public servants
The Public Service Loan Forgiveness program allows certain nonprofit and government employees to have their federal student loans canceled after 10 years, or 120 payments.
A number of recent changes to the policy have increased the number of borrowers who’ve had their debt canceled under it. Those changes include simplifying and broadening the eligibility requirements.
As a result, the Education Department announced this month that it has approved $42 billion in loan cancellation under the PSLF program for more than 615,000 borrowers since October 2021.
The best way to find out if your job qualifies as public service is to fill out the so-called employer certification form. Try to fill out this form at least once a year, said higher education expert Mark Kantrowitz. Borrowers should also maintain records of their confirmed qualifying payments, he said.
The pause on federal student loan payments, which has been in effect for over three years now, has proven to be a massive benefit for borrowers pursuing PSLF, Kantrowitz pointed out. All the months during the pause count toward a borrower’s 120 required payments.
Defrauded borrowers got $13 billion in relief
The Biden administration has been focused on canceling the student debt of borrowers who say their colleges misled them. Over the last few years around 1 million people have had their debt relieved through the so-called borrower defense loan discharge, for a total of $13.3 billion in relief.
Generally, a borrower may qualify for debt cancellation under the provision if their college engaged in misconduct, such as providing false or misleading information about their program or job placement rates, Kantrowitz said.
I feel like this administration has done more for borrowers in a short period of time than any other.
Betsy Mayotte
president of The Institute of Student Loan Advisors
The Project on Predatory Lending at Harvard University has a list of some of the institutions that were part of a student loan cancellation settlement. If you attended one of these colleges and applied for a borrower defense loan discharge on or before June 22, 2022, you should be entitled to automatic relief, Kantrowitz said, even if your application was previously denied. Eligible borrowers will likely get the cancellation no later than Jan. 28, 2024.
An additional 100,000 borrowers, meanwhile, have had their debt canceled because their college closed while they were enrolled or shortly after.
$9 billion for borrowers with disabilities
Around 425,000 federal student loan borrowers have had their debt forgiven under President Joe Biden through the Total and Permanent Disability Discharge, for a total of $9.1 billion in debt erased, according to a calculation of Education Department data by Kantrowitz.
The relief provision is for borrowers with a physical or mental disability that makes it difficult or impossible for them to work.
The U.S. Department of Education in Washington, D.C.
Caroline Brehman | CQ-Roll Call, Inc. | Getty Images
More borrowers with disabilities have seen the relief in recent years, after the Education Department started using data from the Social Security Administration and U.S. Department of Veterans Affairs to identify eligible people and to automatically grant them the cancellation, Kantrowitz said. This process of data matching is usually done once a quarter, he said, and borrowers who are eligible should be notified by the Education Department and their loan servicer.
The Education Department has also decided to do away with the three-year monitoring period of the program, in which borrowers had to continue to meet a number of requirements after they got the relief, including earning below a certain amount. That procedure caused more than half of all approved borrowers to get their loans reinstated, Mayotte said.
Even if a borrower is not considered disabled by another government agency, a doctor or nurse practitioner may also be able to make the case that they qualify for the discharge. Those who think they might be eligible can apply online or by mail.
$400 billion in forgiveness still in the balance
Of course, beyond these tailored relief programs, millions of Americans are waiting for the Supreme Court to rule on President Joe Biden’s sweeping plan to cancel up to $20,000 in student debt per borrower.
The plan could wipe out as much as $400 billion in debt.
If the Biden administration is able to carry out its plan, Kantrowitz said, “you can’t have your loans forgiven twice.”
If you’ve already received debt cancellation under one of the above programs and have no remaining debt, he said, the president’s plan won’t affect you.
If you still have student loans, you may qualify for the broad forgiveness of $10,000 or $20,000, he said.
Kantrowitz said borrowers with questions about their eligibility for loan forgiveness should contact their servicer or the Education Department at 1-800-433-3243.
Meanwhile, there are dozens of other forgiveness options currently available on the state and federal level for those with federal student loans.
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GOP Senators Push Resolution To Overturn Biden’s Student Debt Plan
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A group of Republican senators introduced a resolution Monday to overturn President Joe Biden’s student debt forgiveness plan, intensifying a fight over an issue that’s divided Congress and Americans alike.
The measure — led by GOP Sens. Bill Cassidy of Louisiana, John Cornyn of Texas and Joni Ernst of Iowa — would scrap Biden’s plan to cancel up to $10,000 in student debt for qualifying federal borrowers, with a select group getting relief on up to $20,000 in loans. The plan is expected to cost around $400 billion in federal spending.
“President Biden is not forgiving debt, he is shifting the burden of student loans off of the borrowers who willingly took on their debt and placing it onto those who chose to not go to college or already fulfilled their commitment to pay off their loans,” Cassidy said in a statement Monday. “It is extremely unfair to punish these Americans, forcing them to pay the bill for these irresponsible and unfair student loan schemes.”
People rally to show support for the Biden administration’s student debt relief plan in front of the the Supreme Court of the United States on Feb. 28 as the court heard arguments in a case that could decide the fate of the program. Kent Nishimura via Getty Images
Biden and other advocates for forgiving student loans point to evidence that doing so is ultimately good for the economy because it increases the purchasing power of millions of Americans ― primarily younger generations whose college costs have increased nearly 170% since 1980, a recent study found. The national economic consequences of their financial burdens may become more pronounced in the coming decades as they age and struggle to buy homes, pay for their own children’s education and make other investments in the American economy.
The resolution’s supporters have painted Biden’s plan as an attack on blue-collar workers who didn’t take out student loans.
“President Biden’s attempt to transfer nearly half a trillion dollars in debt to hardworking Americans who chose to avoid or pay off student loans is unfair and unaffordable,” Ernst said in a statement Monday.
But skipping college, which for many Americans is the only way to avoid taking out loans, has its own drawbacks. The U.S. Department of Education has found that people with college degrees have greater employment prospects and higher earning potential. And between 1980 and 2015, the Pew Research Center found, jobs requiring higher education have surged 68%, while those that don’t saw less than half that growth.
Monday’s resolution, which has been co-signed by 36 other Republicans in the Senate, was introduced through the Congressional Review Act ― a fast-track method of overturning federal agencies’ rules that requires only a simple majority in Congress for passage.
The resolution will need the support of at least two Democrats in the Senate in order to pass and be sent to the House, where the GOP holds a slim majority. Biden will be able to veto the resolution if it passes, but Republicans will then have the chance to override him with a two-thirds vote.
Biden’s plan is also currently under review by the U.S. Supreme Court.
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The Federal Reserve is still expected to go through with a rate hike. What that means for you
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Rate hikes, one year later
For its part, the Fed has already hiked its benchmark fund rate eight times over the last year to its current level between 4.5% and 4.75%.
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. But Fed rates also influence consumers’ borrowing costs, either directly or indirectly, including their credit card, mortgage and auto loan rates.
Average credit card rates now top 20%
Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit.
After a prolonged period of rate hikes, the average credit card rate is now over 20%, on average — an all-time high — up from 16.34% one year ago.
At the same time, households are increasingly leaning on credit to afford basic necessities, which makes it even harder for the growing number of borrowers who carry a balance from month to month.
Mortgage rates now average 6.66%
Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.66%, up from 4.40% when the Fed started raising rates last March.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.76% from 3.96% a year ago.
Auto loan rates rose to around 6.48%
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans.
The average interest rate on a five-year new car loan is now 6.48%, up from 4% one year ago.
Federal student loans are already at 4.99%
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by rate hikes. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year, but any loans disbursed after July 1 will likely be even higher.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.
Deposit rates at banks can reach 5.02%
D3sign | Moment | Getty Images
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock-bottom during most of the Covid pandemic, are currently up to 0.35%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 5.02%, much higher than last year’s 0.75%, according to Bankrate.
Although most savers don’t need to worry about the security of their cash at the bank, since no depositor has lost FDIC-insured funds due to a bank failure, any money earning less than the rate of inflation still loses purchasing power over time.
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As court debates student loans, borrowers see disconnect | Long Island Business News
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Niara Thompson couldn’t shake her frustration as the Supreme Court debated President Joe Biden’s student debt cancellation. As she listened from the audience Tuesday, it all felt academic. There was a long discussion on the nuances of certain words. Justices asked lawyers to explore hypothetical scenarios.
For Thompson, none of it is hypothetical. A student at the University of Georgia, she grew up watching her parents struggle with student loans and will graduate with about $50,000 of her own student debt.
“It felt like people who could never understand why we would want something like this,” she said. “I wanted to be like, ‘Y’all don’t understand. Y’all are focusing on this, but there’s people out here who are struggling to find food for their families.’”
Much of the discussion in Tuesday’s hearing centered on whether states had the legal right to sue over Biden’s student loans plan. But the justices also were scrutinizing whether Biden had the authority to waive hundreds of billions of dollars in debt without the explicit approval of Congress, which decides how taxpayer money is spent.
It’s not unusual for Supreme Court cases to hang on legal technicalities, even in cases of great public interest. Yet to borrowers following Tuesday’s arguments, it felt isolating to hear such a personal subject reduced to cold legal language.
Opponents of the plan to wipe away debt held by millions of Americans have denounced it as an insult to those who have repaid their debt and to those who didn’t attend college.
Thompson was among a few dozen borrowers who camped out in drizzle overnight to get seats at the court for Tuesday’s hearing. Some of the court’s liberal justices sought several times to turn the arguments back to the people who would benefit from the program, pointing out their need for relief. In response, conservatives asked if those who passed up college should pay for those who borrowed money to attend.
For Thompson’s family, years of payments hang in the balance. Student loan payments have been on hold since the start of the pandemic, but they are set to restart 60 days after the court cases resolve — regardless of the outcome.
Thompson and her father are each eligible for $10,000 in relief, she said. It would move her a step closer to financial stability, Thompson said, and it would eliminate the rest of her dad’s loans.
“It just hurt my feelings a bit,” she said of Tuesday’s arguments. “I just want better for us, you know?”
The mood inside the court — quiet and ceremonious — was a contrast to the atmosphere outside as dozens of activists rallied in support of cancellation. Crowds chanted and listened to speeches from members of Congress, including Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt.
Advocates took to the podium to share stories about family sacrifices and life milestones deferred because of heavy student debt.
Ella Azoulay, a 26-year-old who lives in Washington, visited the rally to join the push for debt relief, which she calls a “family issue.” A 2018 graduate of New York University, Azoulay has $40,000 in student debt, while her dad has more than $400,000 taken out on behalf of her and her two siblings.
“I can’t really think about my future without thinking about this huge debt,” she said. “My dad has no plans to retire. He’s in his 60s and he has said for my whole life that he will never be able to retire. And that’s really upsetting to hear.”
During the hearing, liberal Justice Sonia Sotomayor said it would be a mistake for her fellow justices to take for themselves, instead of leaving it to education experts, “the right to decide how much aid to give” people who will struggle if the program is struck down.
Other justices also have shown a grasp of borrowers’ plight. Justice Clarence Thomas, the court’s staunchest conservative, has written about the “crushing weight” of his own student loans, which he paid off after reaching the nation’s highest court.
Kayla Smith, 22, joined Thompson at the overnight campout for a seat inside the court. A recent graduate of the University of Georgia, she also felt the discussion missed the bigger picture.
Smith’s mother borrowed more than $20,000 in federal Parent Plus loans to help her pay for college. Smith sees it as the result of a broken system that forces people into debt for a shot at social mobility.
“They were focused on small, minuscule details,” Smith, of Atlanta, said of the justices. “I even saw some of them laughing during the hearing, which was odd to me because people’s lives are being affected. It’s not a laughing matter to us, at least.”
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Supreme Court hears arguments in student loan forgiveness case
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As the Supreme Court weighs in on Biden’s student loan forgiveness plan, here’s a look back at how we got here
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A Jan. 2, 2023 protest in favor of federal student loan relief outside the U.S. Supreme Court in Washington, D.C.
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A shifting financial burden
These days, tuition accounts for about half of public college revenue, while state and local governments provide the other half. But a few decades ago, the split was much different, with tuition providing just about a quarter of revenue and state and local governments picking up the rest.
Over the 30 years between 1991-92 and 2021-22, average tuition prices more than doubled, increasing to $10,740 from $4,160 at public four-year colleges, and to $38,070 from $19,360 at private institutions, after adjusting for inflation, according to the College Board.
Wages haven’t kept up.
“Household income has been stagnant,” higher education expert Mark Kantrowitz told CNBC previously.
Because so few families could shoulder the rising cost of college, they increasingly turned to federal and private aid to help foot the bills.
The shift to “high-tuition, high-aid” caused a “massive total volume of debt,” according to Emily Cook, an assistant professor of economics at Tulane University.
“The federal government should get out of the student loan business,” Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the U.S. Department of Labor, told CNBC.
With nearly no limit on the amount students can borrow to help cover the rising cost of college, “there is an incentive to drive up tuition,” she said.
Now, “schools can charge as much as they want,” Furchtgott-Roth added.
Once families hit their federal student loan limits, they turn to parent student loans and private financing to be able to send their children off to college, an increasingly necessary step for people to have a decent shot at landing in the middle class.
Pursuit of advanced degrees drives up debt
More and more students feel they need to go to graduate school to be competitive in the job market. And more time in school means more costs, and a greater need for borrowing. Around 40% of outstanding federal student loan debt is now taken on post-college for master’s and PhD programs.
The average student debt balance among parents was more than $35,000 in 2018-19, up from around $5,000 in the early 1990s.
Meanwhile, the private student loan market has grown more than 70% over the last decade, according to the Student Borrower Protection Center. Americans now owe more in private student loans than they do for past-due medical debt or payday loans.
Every year millions of new students are pumped into the student loan system while current borrowers struggle to exit it.
Graduates choose longer, costlier payment plans
Many recent college graduates can’t afford the standard 10-year repayment timeline, according to Kantrowitz.
“Generally, people choose the repayment plan with the lowest monthly payment, which is also the plan with the longest term,” he said.
As a result, it takes people 17 years on average to pay off their education debt, data by the U.S. Department of Education shows.
Many borrowers put their loans on hold through forbearances, which cause their debt balances to mushroom with interest, and widespread failures in the government’s forgiveness programs have left those who expected to have their debt written off after a certain period still shouldering it.
The average loan balance at graduation has tripled since the 90s, to $30,000 from $10,000. Around 7% of student loan borrowers are now more than $100,000 in debt.
Without any intervention, over the next two decades, Kantrowitz estimates outstanding student loan debt could hit $3 trillion.
“Given how linear the growth in student debt is, it makes these events easy to predict,” he said.
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2/27: CBS News Prime Time
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The Fate Of Biden’s Student-Loan Relief Plan Rests With The Supreme Court
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The Supreme Court is slated to soon decide the financial fortunes of over 40 million Americans who are in line for significant student loan relief, when it hears arguments on the legality of President Joe Biden’s plan to provide targeted relief to student loan borrowers.
On Feb. 28, the court is expected to hear arguments about whether the millions of Americans eligible for up to $20,000 in student-loan debt forgiveness should get that relief, or whether they should be forced to continue to pay their loans.
With a six-vote conservative supermajority, it seems unlikely that the court would rule to uphold a sweeping executive-branch action by a Democratic administration that involves the redistribution of money from lenders to debtors. But there may be a way for at least some of the court’s conservatives to preserve the debt relief program while achieving a conservative goal.
The most likely way the program would survive the challenges presented in two cases — Biden v. Nebraska and Department of Education v. Brown — is if the outcome turns on the question of standing; that is, whether the parties suing to challenge the program can prove it harms them, and that they are the relevant party being harmed. If the court decides that the six states and two individuals suing the administration lack standing, the justices will not need to actually decide whether the program is legal.
“The standing theories that have been thrown at the wall in these cases are wrong, and many of them would have dangerous implications,” conservative law professors Samuel Bray and William Baude argued in a friend-of-the-court brief submitted in the case.
Despite their own belief that the administration’s debt relief plan is “unlawful,” Bray and Baude argue that none of the states or people filing suit can properly prove they would be harmed by the program. And if the court were to grant standing, it would further expand the ability of states to bring lawsuits to force or block executive actions ― something three of the conservative justices opposed in the 2007 case Massachusetts v. EPA, where the court gave the state “special solicitude” to sue to require the government to regulate carbon emissions.
Chief Justice John Roberts wrote a dissent from that decision that was joined by Justices Clarence Thomas and Samuel Alito and then-Justice Antonin Scalia. In the dissent, Roberts argued that the “special solicitude” granted to states turned standing into “a lawyer’s game, rather than a fundamental limitation ensuring that courts function as courts and not intrude on the politically accountable branches.”
Student loan borrowers are seen gathered at the Supreme Court to tell the court that student loan relief is legal. Larry French via Getty Images
The courts are meant “to decide concrete cases ― not to serve as a convenient forum for policy debates,” Roberts added.
These concerns “proved prophetic,” Bray and Baude write. Since then, there has been a dramatic increase in lawsuits filed by state attorneys general challenging federal actions while the opposing party occupies the White House. Under former President Barack Obama, GOP attorneys general led the way in filing more than 50 suits. Democratic attorneys general filed more than 130 suits when Donald Trump was president. And now Republicans have filed more than 50 such suits against Biden.
“The states’ more extravagant theories are emblematic of the broader trend where states are taking advantage of vague language in Massachusetts v. EPA, to challenge any federal action with which they disagree,” Bray and Baude write. “Unless this Court wishes to sit in constant judgment of every major executive action ― which is not its constitutional role ― it is time to say ‘stop.’”
By rejecting the standing theories offered in the student loan debt cases, Roberts and other conservatives could set forth new limits on states’ “special solicitude” for standing, or reject it entirely. This could help keep the court out of some thorny political questions while making it more difficult for liberal attorneys general to sue to enforce environmental or civil rights law. That’s something that Fordham Law School Professor Jed Shugerman, who supports student debt relief, warned about in a brief to the court in support of the state arguments for standing.
Such a move would allow Roberts to do what he has done in the past: uphold a Democratic president’s policy priority while advancing his own agenda at the same time.
The case against standing for the eight plaintiffs is fairly straightforward, according to Baude, Bray and a brief submitted by the Biden administration, among others.
Biden announced his plan to provide student-loan debt relief for some borrowers on Aug. 24, 2022. The plan provided $20,000 in relief to Pell Grant recipients and $10,000 in relief to other borrowers who made less than $125,000 a year in 2020 or 2021. Biden claimed authority under the HEROES Act of 2003 to provide debt relief during the COVID-19 national emergency.
The debt-forgiveness plan drew swift legal challenges backed by conservatives. The states of Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina sued in the 8th Circuit, while Myra Brown and Alexander Taylor, two student borrowers, brought suit in the 5th Circuit.
Among Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina, the 8th Circuit Court of Appeals only gave standing to Missouri. The claims of harm from the other five states were all too weak, as they were found to be either self-inflicted or nonexistent.
Iowa, Kansas, Nebraska and South Carolina claimed that they would lose tax revenue due to a 2021 law that exempts student-loan debt discharges from being calculated as “gross income.” These states allege they would lose tax revenue because they tie their own state tax definitions of “gross income” to the IRS’s definition.
However, court precedent says that a state cannot allege a harm from an act that is self-inflicted. It was the individual choice of Iowa, Kansas, Nebraska and South Carolina to tie their state tax codes to the federal tax code.
In the 1976 case of Pennsylvania v. New Jersey, the court ruled that Pennsylvania could not claim it was harmed when New Jersey enacted a new tax, despite Pennsylvania’s argument that it incurred harm because it allowed residents to claim a tax credit for taxes paid to other states. The court found that Pennsylvania did not need to provide such tax credits, and it ruled that no state “can be heard to complain about damage inflicted by its own hand.”
The claim for standing is also suspect because the alleged harm isn’t direct. In a 1927 case, after Florida challenged a federal inheritance tax on the grounds that it would cost the state tax revenue, the court rejected Florida’s argument, finding that the harm was “at most, only remote and indirect.”
President Joe Biden announces his student-loan debt forgiveness plan in the Roosevelt Room of the White House with Education Secretary Miguel Cardona. Demetrius Freeman/The Washington Post via Getty Images
The states of Arkansas, Missouri and Nebraska claim that they would lose revenue because the White House’s program only benefits direct loans over family loans, and would encourage borrowers to consolidate any family loans into direct loans. Since some state entities hold investments in family loans, these states claim they would be harmed. But the administration changed its policy to forbid debt holders from consolidating in this manner in order to receive the proposed relief.
“Borrowers with federal student loans not held by [the Department] cannot obtain one-time debt relief by consolidating those loans into Direct Loans,” the brief submitted to the court by the Biden administration notes.
As for Brown and Taylor, they both sued to challenge the plan by claiming they would not receive the promised relief in whole, for holding a private loan, or in part, for not receiving the maximum $20,000 offered to Pell Grant recipients. They argued that their ability to register their complaints was short-circuited when the administration did not post the policy through the normal notice-and-comment process.
Here, the remedy sought by Brown and Taylor, of eliminating the program entirely, does not match the harm they allege ― their exclusion from all or some of the relief. The briefs from Baude and Bray, and from the Biden administration, argue that they lack standing since eliminating the program would not resolve their alleged harms.
As for the administrative complaint, the HEROES Act exempts changes in debt payments during a declared national emergency from the normal notice-and-comment period, so the Biden administration’s brief contends that this harm does not actually exist.
That leaves Missouri ― which claims it would lose money that the state-created student loan servicer MOHELA is obligated to donate to a state capital improvements fund, because MOHELA could lose income from any loans it holds that are forgiven.
While this is the “strongest argument for standing made by any of the plaintiffs,” Bray and Baude argue, it is nevertheless problematic because “the state of Missouri is not the ‘proper party’ to bring this lawsuit.”
Despite being created by the state, MOHELA is an independent entity that has the power to sue and be sued. MOHELA, not Missouri, is the party that should be suing here, the briefs from Bray and Baude and from the Biden administration argue ― something it is conspicuously not doing.
The claim of standing because MOHELA may not be able to pay its state obligations has its own problems. Aside from the argument being speculative, the state already provides MOHELA extensions and delays in paying what it owes. It could also set a new standard for standing that would create a host of perverse consequences.
If the court were to accept such a theory, it would give “any lender” the standing to sue to block “any regulation that reduced the income of any of its borrowers,” Bray and Baude argue ― adding that “such a theory should not be taken more seriously here.”
The conservative justices may ultimately rule in favor of standing, as they have in a number of post-Massachusetts v. EPA cases where states made similar arguments. If they do, then the case would come down to whether the relief program is legal, or if it is not allowed under the court’s “major questions doctrine” that limits expansive regulatory actions that affect the economy. But standing is the best bet the Biden administration has to keep its plan intact, even if it comes with collateral damage.
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Biden’s student loan forgiveness plan heads to the Supreme Court. How that affects the payment pause
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Littlebee80 | Istock | Getty Images
It’s been nearly three years since most people with federal student loans have had to make a payment on their education debt.
The U.S. Department of Education has repeatedly cited specific dates for when the bills would resume, only to extend the pandemic-era break yet again.
Most recently, amid legal challenges to the Biden administration’s student loan forgiveness plan, the government told borrowers they’d get even more time. But the timing it gave wasn’t as straightforward as it was with previous extensions.
Here’s what borrowers need to know.
Student debt bills may not resume for months
In August 2022, President Joe Biden promised to cancel up to $20,000 of student loan debt for tens of millions of Americans, but Republicans and conservatives quickly filed a number of lawsuits against his plan, forcing the administration to close its application portal in early November.
As a result of those challenges, the Education Department announced another extension of the repayment pause in late November.
It said federal student loan bills will be due again 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt. But the Department added that if the Biden administration is still defending its policy in the courts by the end of June, or if it’s unable to move forward with forgiving student debt by then, the payments will pick up at the end of August.
More from Personal Finance:
64% of Americans are living paycheck to paycheck
What is a ‘rolling recession’ and how does it impact you?
Almost half of Americans think we’re already in a recessionThe Supreme Court will begin to hear oral arguments over Biden’s plan at the end of February.
When payments could resume depends in part on when the justices reach their decision, said higher education expert Mark Kantrowitz.
“If the court issues a ruling a few weeks after the Feb. 28 hearing, repayment could restart in May or June,” Kantrowitz said. “If they wait until the end of the term, when they go on recess, in June or July, then there would be an August or September restart.”
Another payment pause extension is possible
It’s a time of uncertainty for the federal student loan system.
With Biden’s forgiveness plan up in the air, borrowers may be unsure what they owe. Throughout the pandemic, there have been a lot of changes to the companies that service federal student loans. And then there’s the fact that after three years without payments, millions of Americans have simply become accustomed to life without student debt bills.
“These student loan borrowers had the reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” Education Department Undersecretary James Kvaal said in a November court filing. “This belief may well stop them from making payments even if the Department is prevented from effectuating debt relief.
“Unless the Department is allowed to provide one-time student loan debt relief,” he went on, “we expect this group of borrowers to have higher loan default rates due to the ongoing confusion about what they owe.”
Considering that the U.S. Department of Education has already extended the payment pause roughly eight times, it’s possible borrowers could get more time still, Kantrowitz said.
“There will always be an excuse if they want a reason for another extension,” he said. “The most likely reasons could include a new worrisome Covid-19 mutation or economic distress.”
For now, collection activity still on pause
The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks if they fall behind on their student loans.
During the extended payment pause, however, the Education Department also says it won’t resume collection activity.
Borrowers in default on their student loans should also look into the recently announced “Fresh Start” initiative, in which they’ll have the opportunity to return to a current status.
Make the most of extra cash during the ongoing break
With headlines warning of a possible recession and layoffs picking up in some sectors, experts recommend that borrowers try to salt away the money they’d usually put toward their student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. Consumers will just want to make sure any account they put their savings in is insured by the Federal Deposit Insurance Corp., meaning up to $250,000 of the deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say.
The average interest rate on credit cards is currently more than 20%.
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The Federal Reserve is likely to hike interest rates again. What that means for you
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The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting.
This time, Fed officials likely will approve a 0.25 percentage point increase as inflation starts to ease, a more modest pace compared with earlier super-size moves in 2022.
Still, any boost in the benchmark rate means borrowers will pay even more interest on credit cards, student loans and other types of debt. On the flip side, savers could benefit from higher yields.
More from Personal Finance:
What is a ‘rolling recession’ and how does it impact you?
Almost half of Americans think we’re already in a recession
If you want higher pay, your chances may be better now“The good news is that the worst is over,” said Yiming Ma, an assistant finance professor at Columbia University Business School.
The U.S. central bank is now knee-deep in a rate hike cycle that has raised its benchmark rate by 4.25 percentage points in less than a year.
Although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially and the pace of rate hikes is going to slow,” Ma said.
The good news is that the worst is over.
Yiming Ma
assistant finance professor at Columbia University Business School
The goal remains to tame runaway inflation by increasing the cost of borrowing and effectively pump the brakes on the economy.
What the Fed’s rate hike means for you
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Whether directly or indirectly, higher Fed rates influence borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.
Here’s a breakdown of how it works:
Credit cards
Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.
After rising at the steepest annual pace ever, the average credit card rate is now 19.9%, on average — an all-time high. Along with the Fed’s commitment to keep raising its benchmark to combat inflation, credit card annual percentage rates will keep climbing, as well.
Households are also increasingly leaning on credit to afford basic necessities, since incomes have not kept pace with inflation. This makes it even harder for the growing number of borrowers who carry a balance from month to month.
“Credit card balances are rising at the same time credit card rates are at record highs; that’s a bad combination,” said Greg McBride, chief financial analyst at Bankrate.com.
If you currently have credit card debt, tap a lower-interest personal loan or 0% balance transfer card and refrain from putting additional purchases on credit unless you can pay the balance in full at the end of the month and even set some money aside, McBride advised.
Mortgages
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
“Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly,” said Jacob Channel, senior economist for LendingTree.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.4%, down from mid-November, when it peaked at 7.08%.
Still, “these relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel added.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.
Auto loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% at the beginning of 2022.
Boonchai Wedmakawand | Moment | Getty Images
“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.
Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be affected immediately by a rate hike. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.
Savings accounts
On the upside, the interest rates on some savings accounts are higher after a run of rate hikes.
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.
Guido Mieth | DigitalVision | Getty Images
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
“If you are shopping around, you are finding the best returns since the great financial crisis. If you are not shopping around, you are still earning next to nothing,” McBride said.
Still, any money earning less than the rate of inflation loses purchasing power over time, and more households have less set aside, in general.
“The best advice is pick up a side hustle to bring in some additional income, even if it’s just temporary, and pay yourself first with a direct deposit into your savings account,” McBride advised. “That’s how you are going to create the pathway to be able to save.”
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Earning less than $30,000 a year is a ‘deal breaker’ for daters, new survey finds
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One-third of couples don’t talk about finances until after marriage, according to a recent survey of 1,000 adults by Western & Southern Financial Group.
This is especially alarming because, as it turns out, people do have financial deal breakers when it comes to seeing someone as a potential partner.
When asked what amount of debt or how low a salary would make a potential partner undateable, survey respondents had some surprising answers. Here are two financial deal breakers, according to the study.
Salary deal breaker: Less than $29,878
This is well below the median annual salary in the United States, which is $37,522, according to 2021 data from the U.S. Census Bureau.
Salary was the number one financial trait that respondents wish they had talked about sooner with their partners.
More than one-fourth, 27.2%, of those surveyed said they only talked about salaries after getting married. And 18.7% said they talked about salaries after getting engaged.
Student loan debt deal breaker: More than $28,076
This is below the average amount of student loan debt someone with a bachelor’s degree has, which is $37,574, according to data from Education Data Initiative.
Men are a little more forgiving of debt than women, the survey showed. For men, $31,179 was a deal breaking amount of debt. For women it was $22,901.
Personal loans and credit card debt were also a source of friction while dating, according to the survey.
Ask your partner these 5 money questions
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How to Make More Money in 2023, According to The FI Couple
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It was 2017, the year before they got married, when Ali and Josh Lupo took a serious look at their finances — and realized they owed more than $100,000 in student loans.
Courtesy of The FI Couple
Despite working long, hard hours in human services, the couple was still living paycheck-to-paycheck, unsure how they’d afford a wedding or pay off their staggering debt.
“So we started having that conversation of: ‘Is this what we want to do for the next 30 to 40 years, or do we want to start learning how to live differently?’ And that was where our mindset around money really started to evolve,” Josh tells Entrepreneur.
The Lupos began tracking their expenses and saw they spent most of their income on rent and car payments, followed by food and dining out. Their first plan of attack? Implementing a strict budget: No date nights, no Netflix subscription, etc.
But the extreme approach burned the couple out quickly, so they went back to the drawing board. They needed to find a creative way to reduce their largest expense: housing.
Self-education led them to a solution (Ali emphasizes how many online resources, podcasts and books on financial freedom exist). If the Lupos purchased a multi-family home with a low down payment, they could dramatically decrease their monthly payments by renting out the other unit.
So that’s exactly what they did.
In the years since then, the Lupos have continued their journey to financial independence. They manage numerous streams of active and passive income, including their work as personal-finance content creators running the educational platform “The FI Couple.”
If you’re ready to get your finances on track in 2023, read on for the Lupos’ step-by-step strategy.
Define what success looks like for you
The first step is the foundation for all the rest: Figure out your unique definition of success.
The couple suggests considering what your ideal day and life look like. In other words, be clear about how financial freedom will allow you to do more of the things that make you happy.
“Our life was ‘easier’ when our heads were in the sand, ignoring everything about our finances,” Ali says. “Our lives are more complicated and harder now because we’re more in tune with all of the responsibilities that come with this. But to have the power and autonomy over our time is worth all of it, so [you have to be] clear with your why.”
Related: How to Train Your Brain and Reach the Highest Levels of Success
Build a community that can help you stay the course
The road to financial freedom can be a difficult one, but it’s even harder for those going it alone.
Finding a community geared towards financial wellness can make all the difference, according to the Lupos.
“Unfortunately, being financially savvy is not the norm,” Josh says, “and pursuing financial independence can get lonely because a lot of people aren’t necessarily living the same lifestyle. So whether it’s in person or online, having that community of like-minded people can be really inspiring.”
Related: The Key Benefits of Building an Online Community
Know your numbers: income, expenses, assets and debts
Another critical move? Get thoroughly acquainted with the reality of your financial picture.
As of September 2022, consumer debt in the U.S. was at $16.5 trillion, according to Bankrate. But many Americans are unaware of how much they actually owe: A 2019 survey from U.S. News found that one in five Americans doesn’t know if they have credit card debt.
The Lupos stress the value of familiarizing yourself with all of your numbers.
“So literally outlining and understanding your income, expenses, assets and debts,” Ali explains, “and having a crystal clear understanding of your financial situation.”
Related: 5 Strategies for Entrepreneurs to Steer Clear of the Debt Trap
Figure out how to lower expenses and increase your income
Next up, consider how you might save and earn more money — “the two biggest levers a person can pull,” Josh notes.
The couple acknowledges that increasing your income significantly can seem challenging at first, but the key is to get creative.
“We decided to focus on how we could radically lower our expenses to increase our savings,” Josh says, “and doing so helped us pay off all the debt and buy real estate.”
“If you’re able to increase your income and reduce your expenses, you’ll have more of a gap in between,” Ali adds, “and what you do with that gap is the key to becoming financially independent.”
Never underestimate your earning potential either.
“Coming from backgrounds in social work and human services that are historically lower-income opportunities, for a long time we identified ourselves as people [whose] value was a little bit lower and [thought] earning more just simply wasn’t in the cards,” Josh says. “In hindsight though, [the key is] getting around the right people and understanding different opportunity vehicles.”
Related: 10 Ways to Make Money While You Sleep
Consider which strategy makes the most sense for your lifestyle
It’s not enough to brainstorm a solution and go all in — part of the secret is choosing an approach that aligns with your values and priorities.
As fundamental as real estate investment has been to the Lupos’ success, the couple recognizes that it’s not for everyone.
“The goal of financial independence is to have enough assets to pay for your overall cost of living,” Ali says. “So you have to [ask], What strategy makes sense for me? Do I want to invest in stocks? Do I want to invest in real estate? Do I want to be a business owner?“
“We talk to people all the time,” she continues. “They say, ‘I want to buy real estate.’ But then we talk to them, and I’m like, ‘It doesn’t really sound like you want real estate. Because real estate’s not that passive — and it’s a little more hands-on.’ You really have to think about which investing strategy makes sense for [your] life.”
Real estate isn’t always “passive”
Then again, neither are 40-50 hour weeks at a job
At least with real estate “hard” weeks are still only 2-3 hours of work
— TheFIcouple (@theficouple) December 11, 2022
Maybe the most important thing to keep in mind, though? Don’t forget to enjoy the journey to financial freedom.
“When we first started out, it felt like a chore,” Ali says. “Through the process, we’ve learned that the journey to financial independence is more important than the destination and that it’s really important that whatever you do to get there is sustainable and you don’t sacrifice the quality of your life to achieve [your] goal. Because then once you get to the goal, what life do you have?”
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Amanda Breen
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Here are some smart moves borrowers should make while the fate of student loan forgiveness is still up in the air
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Creatas | Creatas | Getty Images
1. Make the most of extra cash
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to put away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
2. Consider making payments anyway
Boy_anupong | Moment | Getty Images
If you have a healthy rainy day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.
There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
3. Review your options for when payments resume
Even though there’s some uncertainty around the date that federal student loan bills will pick up again, you want to be prepared for whenever they do.
You can compare how much your monthly bill would be under different repayment plans using one of the calculators at Studentaid.gov or Freestudentloanadvice.org.
If you’re unemployed or dealing with another financial hardship, you might want to put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue.
If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that with forbearance, interest will rack up and your balance will be larger — possibly much larger — when you resume paying.
4. Check if refinancing makes sense now
Higher education expert Mark Kantrowitz had previously recommended that federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is on the table — if the president’s policy survives the Supreme Court — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option.
Betsy Mayotte
president of The Institute of Student Loan Advisors
Those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel, he said. The latter borrowers may want to look at refinancing the portion of their debt over the relief amounts, he added.
Still, borrowers should first understand the federal protections they’re giving up by refinancing, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.
For example, the U.S. Department of Education allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” said Mayotte in a previous interview about refinancing.
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Subsidized vs. Unsubsidized Student Loans: What to Borrow?
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Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other financial professional to determine what may be best for your individual needs.
A college education in the U.S. might be expensive, but it’s still accessible to many American students thanks to federal student loans. The only problem: It can be tough to know which student loans to choose from, mainly subsidized vs. unsubsidized student loans.
If you’re unsure what to borrow or the difference between these student loan types, you’ve come to the right place. Read on for more information about subsidized and unsubsidized student loans.
What are subsidized student loans?
A subsidized student loan, also called a direct subsidized loan, is a federal student loan available to undergraduate students if they show sufficient financial need.
Being subsidized means interest rates are temporarily paid for or halted by the government, and are generally much lower than unsubsidized loans. This allows students to focus on education without worrying about interest accruing on them for some of their terms.
More specifically, the US Department of Education pays all of the interest on subsidized student loans so long as the borrower is enrolled at least half-time in school. This arrangement continues for six months after graduation and during other applicable deferment periods.
What are unsubsidized student loans?
An unsubsidized student loan is also a kind of federal student loan. But unlike subsidized loans, the interest rates for unsubsidized loans begin accruing as soon as money is distributed to a borrower’s school.
However, this doesn’t mean that students need to pay the interest right off the bat. Students can choose not to pay the interest while in school and throughout a six-month grace period after graduation. However, unpaid interest accumulates during this time and constantly adds to the borrower’s total balance.
Main differences between subsidized and unsubsidized student loans
To recap: Subsidized student loans’ interest is paid for by the government while students are in school and for six months after graduation.
The government does not pay for unsubsidized student loans’ interest at any point, so it consistently accumulates. Graduate students only have eligibility for unsubsidized loans, and only in some cases.
However, there are many differences between subsidized and unsubsidized student loans aside from the above basic breakdown. Here’s a closer look at those differences.
Loan limits and qualifications
Direct subsidized student loans have lower annual loan limits than direct unsubsidized loans. For example, first-year dependent undergraduate students can borrow $3500 in subsidized loans and $5500 in unsubsidized loans. Both contribute to a total federal student loan limit of $23,000.
Furthermore, students must demonstrate sufficient financial need to qualify for subsidized types of loans. You can apply via the FAFSA or Free Application for Federal Student Aid. In contrast, unsubsidized student loans are available to any student borrower, no matter their financial need.
Interest and fees
As mentioned above, the most significant difference between subsidized and unsubsidized student loans is how interest is handled. Subsidized student loans have their interest paid by the government for a while, but unsubsidized loans do not.
There are other differences as well, however. Subsidized federal student loans have fixed annual percentage rates or APRs of 4.99% for all loans disbursed from July 1, 2022, through June 30, 2023. These apply to loan payments (usually monthly payments) required over the life of the loan.
Unsubsidized federal student loans have fixed APRs of 4.99% for undergraduate loans, 6.54% for graduate or professional student loans, and 7.54% for PLUS loans. These rates apply for the same timeframe as subsidized loans.
Meanwhile, subsidized and unsubsidized loans have fees of 1.057% for all loans disbursed between October 1, 2020, and October 1, 2021.
Grace periods and deferment
Subsidized and unsubsidized federal student loans have six-month grace periods, or periods of deferment, meaning student loan repayment won’t begin until six months after graduation.
However, unsubsidized loans’ interest capitalizes, meaning that it is added to the original loan amount. That’s because, as stated above, the federal government doesn’t pay the interest fees for unsubsidized student loans.
Unfortunately, this can lead to a spiraling and costly effect. The larger the principal loan balance gets, for example, the more each successive interest charge adds to the pile. Therefore, prospective students should be careful about using too many unsubsidized federal student loans.
As far as deferment is concerned, the Education Department pays interest for all subsidized loans during deferment periods, like the recent one for Covid-19. Unsubsidized loans, of course, have their interest continue to be collected during deferment.
Recently, the U.S. government released a student loan debt relief program. U.S. citizens could qualify for loan forgiveness. However, this program is currently blocked.
How much money can you borrow?
Now that you know the significant differences between subsidized and unsubsidized student loans, you might wonder what the maximum amount you can borrow is.
Dependent first-year undergraduate students can borrow $5500 in student loans, of which no more than $3,500 can be subsidized. Independent students, meanwhile, can borrow up to $9,500. Again, only up to $3,500 can be in subsidized loans.
The loan rates increase for each successive year of schooling. Here’s a breakdown:
- Dependent second-year undergraduate students: $4,500 in subsidized loans, $6,500 total.
- Independent second-year undergraduate students: $4,500 in subsidized loans, $10,500 total.
- Dependent third-year and beyond undergraduate students: $5,500 in subsidized loans, $7,500 total.
- Independent third-year and beyond undergraduate students: $5,500 in subsidized loans, $12,500 total.
As you can see, you can only take out a certain amount of money in loans per year from the federal government. If you have more financial needs, you’ll have to seek financial aid through scholarships, grants or loans from private lenders or other institutions.
Which should you use: subsidized or unsubsidized student loans?
Given all this information, you might ask yourself whether you should prioritize subsidized unsubsidized student loans.
For most American students, the answer is clear: Subsidized student loans are superior because you don’t have to worry about interest accruing while you are at school and through any grace or deferment periods.
In this way, you’ll pay less for subsidized loans over their lifespans than unsubsidized loans. However, you can’t take out as much money in federal direct subsidized loans as you can in unsubsidized loans.
The most followed strategy is this:
- Apply for as many federal student-subsidized loans as you can. Take out as much money through this system as possible, as it is the most cost-effective way to pay for your education and benefit from plentiful repayment options.
- Then, only if you still need a little more money, take out extra unsubsidized federal student loans for the remainder of the academic year to pay for the cost of attendance.
- Alternatively, pursue other means of financial aid, like scholarships, grants, and other loans with low-interest rates from secondary financial institutions and lenders like banks or credit unions.
If you do this, you’ll negate as many of your future interest payments as possible and walk away with as much financial aid as possible.
Related: Don’t Be a Victim: 4 Ways You Can Take Charge of Your Student Loans
Should you take out federal or private student loans?
Given the potentially high costs of unsubsidized federal student loans, some students might wonder whether private loans are better.
It’s almost always better to borrow federally first. Why? Private loans, even those offered by trustworthy financial institutions, usually have higher interest rates. They also usually require cosigners if student borrowers don’t have credit histories, which is very common for first-time college students.
Related: Private and Federal Student Loans for College: Which Works Best for Your Child?
Meanwhile, subsidized and unsubsidized federal student loans offer more forgiveness and refinancing options, borrower repayment plans and extra flexibility compared to private loans.
In the worst-case scenario, if you default on your loans and have a ton of student debt, you’ll have an easier time resolving things with federal student loans than with private student loans.
You should only use private student loans if you have to fill unexpected payment gaps to meet college expenses or if you find an excellent deal with a low-interest rate. In that case, a private student loan might be slightly better compared to an unsubsidized student loan, but that’s rarer than not.
Summary
In many ways, subsidized student loans might be superior to unsubsidized loans. Still, both could allow you to acquire a college education and open up new professional pathways for your future.
If you qualify for student loans, it may be best to take them, provided you plan to pay them back once you graduate. Additionally, consult your college’s financial aid office to receive more personalized counseling.
Looking for more resources to expand your financial knowledge? Explore Entrepreneur’s Money & Finance articles here
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Entrepreneur Staff
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Student loan forgiveness is headed to the Supreme Court. What that means for the payment pause
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West | Istock | Getty Images
The Biden administration’s most recent announcement that the pause on federal student loan bills would be extended left borrowers with more uncertainty: It didn’t provide a date for when the payments would resume.
The pandemic-era relief policy suspending federal student loan bills and the accrual of interest has been in effect since March 2020. Turning the $1.7 trillion lending system back on for some 40 million Americans is a massive task that the U.S. Department of Education has been reluctant to undertake.
The administration had hoped to ease the transition for borrowers by first forgiving a large share of student debt, but its plan to do so, unveiled in August, soon faced a barrage of legal challenges and remains tied up in the courts. That development is why borrowers have gotten even more time without a student loan bill.
Here’s what you need to know about the latest payment pause extension.
Student loan bills could resume as soon as May 1
The Education Department has left things a little open-ended when it comes to the timing of federal student loan payments resuming.
It has said the bills will be due again only 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt.
If the Biden administration is still defending its policy in the courts by the end of June, or if it’s unable to move forward with forgiving student debt by then, the payments will pick up at the end of August, it said.
Most recently, the Supreme Court has said it will hear oral arguments around the president’s plan in February.
That means the earliest that payments could restart would likely be May 1, if the justices reach a quick decision, said higher education expert Mark Kantrowitz.
Borrowers who are behind may get a ‘fresh start’
The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks if they fall behind on their student loans.
During the extended payment pause, however, the Education Department is also ceasing all collection activity, it said.
Borrowers in default on their student loans should also look into the recently announced “Fresh Start” initiative, in which they’ll have the opportunity to return to a current status.
Refinancing may be worth considering
Kantrowitz had previously recommended that, despite the chance of picking up a lower interest rate, federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is coming — if the president’s policy survives in the courts — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
It would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay, were it not for the baseless lawsuits brought by Republican officials and special interests.
Miguel Cardona
Secretary of the U.S. Department of Education
He said those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel. Those borrowers may want to look at refinancing the portion of their debt over the relief amounts, Kantrowitz said.
Borrowers need to first understand the federal protections they’re giving up before they refinance, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.
For example, the Education Department allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” Mayotte said, in a previous interview about refinancing.
Make the most of extra cash during the payment pause
Boy_anupong | Moment | Getty Images
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to salt away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC-insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
Some may want to keep paying during the pause
If you have a healthy rainy-day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.
There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
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Millions Of Student Debt Forgiveness Applicants Get False Good News Email
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Around 9 million people who applied for President Joe Biden’s student loan forgiveness plan reportedly received emails wrongly saying their debt relief requests had been approved.
The emails, sent last month by the Department of Education, contained an incorrect subject line telling people their debt relief requests had been granted. Actually, decisions on the applications have been frozen as the administration awaits the outcome of court challenges. The remainder of the email was accurate.
The Education Department apologized for the mistake in a new email on Tuesday reviewed by CNN. It blamed a “vendor error.”
Biden’s plan, which would write off up to $10,000 per applicant making up to $125,000 and up to $20,000 for Pell Grant recipients, remains blocked by courts, forcing the administration to stop accepting further applications.
“We have received your application but are not permitted to review your eligibility because of ongoing litigation,” the department said in this week’s email to 9 million applicants. “We will keep your application information and review your eligibility if and when we prevail in court.”
About 26 million people applied for student debt forgiveness before the plan was put on hold. About 16 million applications have been approved, according to the department. No relief actually has been granted, however, amid the court challenges.
The Supreme Court has agreed to hear two separate cases challenging Biden’s plan. Justices are due to hear arguments this winter in a case brought by six Republican-led states challenging Biden’s executive authority to grant the debt relief.
On Monday, the justices agreed to hear a second case involving two student borrowers who didn’t meet the requirements for Biden’s plan, according to CNN.
Last month, Biden extended the pause on student loan payments until June 30, allowing time for the Supreme Court to rule on the case brought by the GOP states. It’s unclear if the second case would affect that timeline.
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The Federal Reserve is about to hike interest rates one last time this year. Here’s how it may affect you
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The Federal Reserve is expected on Wednesday to raise interest rates for the seventh time this year to combat stubborn inflation.
The U.S. central bank will likely approve a 0.5 percentage point hike, a more typical pace compared with the super-size 75 basis point moves at each of the last four meetings.
This would push benchmark borrowing rates to a target range of 4.25% to 4.5%. Although that’s not the rate consumers pay, the Fed’s moves still affect the rates consumers see every day.
Why a smaller rate hike may be ‘pretty good news’
By raising rates, the Fed makes it costlier to take out a loan, causing people to borrow and spend less, effectively pumping the brakes on the economy and slowing down the pace of price increases.
“For most people this is pretty good news because prices are starting to stabilize,” said Laura Veldkamp, a professor of finance and economics at Columbia University Business School. “That’s going to bring a lot of reassurance to households.”
However, “there are some households that will be hurt by this,” she added — particularly those with variable rate debt.
For example, most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.
But it doesn’t stop there.
More from Personal Finance:
Just 12% of adults, and 29% of millionaires, feel ‘wealthy‘
35% of millionaires say they won’t have enough to retire
Inflation boosts U.S. household spending by $433 a monthWhat the Fed’s rate hike means for you
Another increase in the prime rate will send financing costs even higher for many other forms of consumer debt. On the flip side, higher interest rates also mean savers will earn more money on their deposits.
“Credit card rates are at a record high and still increasing,” said Greg McBride, chief financial analyst at Bankrate.com. “Auto loan rates are at an 11-year high, home equity lines of credit are at a 15-year high, and online savings account and CD [certificate of deposit] yields haven’t been this high since 2008.”
Here’s a breakdown of how increases in the benchmark interest rate have impacted everything from mortgages and credit cards to car loans, student debt and savings:
1. Mortgages
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
“Though they are falling, mortgage rates are still at a more than 10-year high,” said Jacob Channel, senior economic analyst at LendingTree.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.33%, down from mid-November, when it peaked at 7.08%.
For would-be buyers, a 30-year, fixed-rate mortgage on a $300,000 loan would cost about $1,283 a month at last year’s 3.11% rate. If you paid today’s 6.33% instead, that would cost an extra $580 a month or $6,960 more a year and another $208,800 over the lifetime of the loan, Channel calculated.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.3% from 4.24% earlier in the year.
2. Credit cards
Credit card annual percentage rates are now more than 19%, on average, up from 16.3% at the beginning of the year, according to Bankrate.
“Even those with the best credit card can expect to be offered APRs of 18% and higher,” said Matt Schulz, LendingTree’s chief credit analyst.
But “rates aren’t just going up on new cards,” he added. “The rate you’re paying on your current credit card is likely going up, too.”
Further, households are increasingly leaning on credit cards to afford basic necessities since incomes have not kept pace with inflation, making it even harder for those carrying a balance from month to month.
If the Fed announces a 50 basis point hike as expected, the cost of existing credit card debt will increase by an additional $3.2 billion in the next year alone, according to a new analysis by WalletHub.
3. Auto loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.05%, up from 3.86% at the beginning of the year, although consumers with higher credit scores may be able to secure better loan terms.
Paying an annual percentage rate of 6.05% instead of 3.86% could cost consumers roughly $5,731 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.
Still, it’s not the interest rate but the sticker price of the vehicle that’s primarily causing an affordability crunch, McBride said.
4. Student loans
The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. It won’t budge until next summer: Congress sets the rate for federal student loans each May for the upcoming academic year based on the 10-year Treasury rate. That new rate goes into effect in July.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers are also paying more in interest. How much more, however, will vary with the benchmark.
Currently, average private student loan fixed rates can range from 2.99% to 14.96%, and 2.99% to 14.86% for variable rates, according to Bankrate. As with auto loans, they vary widely based on your credit score.
5. Savings accounts
On the upside, the interest rates on some savings accounts are also higher after consecutive rate hikes.
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.24%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
“Interest rates can vary substantially, especially in today’s interest rate environment in which the Fed has raised its benchmark rate to its highest level in more than a decade,” said Ken Tumin, founder of DepositAccounts.com.
“Banks make money off of customers who don’t monitor their interest rates,” Tumin said.
With balances of $1,000 to $25,000, the difference between the lowest and highest annual percentage yield can result in an additional $51 to $965 in a year and $646 to $11,685 in 10 years, according to an analysis by DepositAccounts.
Still, any money earning less than the rate of inflation loses purchasing power over time.
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