Inflation has hit some private student borrowers particularly hard. Those with variable rate student loans have seen their interest rates skyrocket.
Worse still, inflation shows no signs of abating, which could mean that high interest rates are here to stay.
There are options for borrowers stuck in this situation, but there is no one method that will work 100% of the time for all borrowers.
What makes private student loans suddenly have high interest rates?
Lenders love to market variable rate loans.
During times of low interest rates, which happened when many of us were in college, variable rate loans seemed especially tempting.
The problem is that when interest rates rise, the interest rate changes on the loan. Rates may change monthly, quarterly or annually. In many cases, lenders do not warn borrowers that their interest rate is going up.
Over the past year, interest rates have greatly increased due to inflation. As long as inflation persists, borrowers can expect their variable rate loans to remain at a high interest rate.
The big goal: eliminating debt
As interest rates rise and monthly payments increase, many borrowers struggle.
These tough times can make borrowers desperate. Many borrowers request temporarily reduced payments or a suspension of payments, such as forbearance or postponement.
Unfortunately, these options often only serve to make matters worse. Unless you are facing a temporary ordeal that may end soon, a postponement or an abstention is probably a mistake.
When handling private student loans, the goal should be debt elimination. Debt can linger unnecessarily for years if your only concern is manageable monthly payments.
The Quick Fix: Dealing With Sudden Interest Rates
For borrowers with stable employment and a strong credit score, refinancing is usually the quickest way to make interest rates manageable.
Is student loan refinancing dangerous? If you have federal student loans, refinancing with a private lender can be a risky decision.
In the case of private loans, there is significantly less risk because the debt is already a private loan. In a private loan refinance, the debt simply moves from one lender to another. Refinancing makes sense if you can get a lower interest rate from a refi lender.
As of February 2023, the following lenders offered the lowest fixed rate loans on a student loan refinance.
For borrowers looking for lower interest rates with the lowest possible monthly payment, a 20-year loan often makes the most sense.
The following lenders offer the lowest interest rates on 20-year fixed rate loans:
Get help from the government
The government is offering generous benefits for federal borrowers, such as income-contingent repayment and student loan forgiveness.
Unfortunately, these borrower protections are not available for private student loans. Besides, converting private student loans to federal student loans is nearly impossible.
However, since many private student borrowers are also federal borrowers, these federal benefits can help borrowers tackle their private debt.
If you have a high-interest private loan and a low-interest federal loan, attacking the private loan first can result in significant interest savings. For example, if a borrower can switch from the standard repayment plan to a income-based repayment plan, they could reduce their monthly bill by hundreds of dollars each month. This extra money would allow the borrower to pay extra for their private loan.
Get help from a co-signer
Generally speaking, co-signing a student loan is objectively a bad idea. The co-signer takes huge risks and the borrower reaps all the benefits.
That said, many parents, relatives, and friends decide to co-sign loans to help their loved ones attend college.
If you are having trouble repaying your private loan, it is essential that you speak to your co-signer. They can choose to help make payments so that their credit score is not negatively affected.
Another option for co-signers would be to co-sign a refinance loan. The co-signer is still tied to the debt, but the borrower gets a lower interest rate and has a better chance of canceling the loan without forcing the co-signer to make payments.
Prevent interest rate hikes
Unfortunately, borrowers don’t have many options to stop their lenders from raising interest rates.
If you have a variable rate loan, there are only two ways to keep rates from going up:
Perhaps worst of all, these limited options mean the most struggling borrowers will also have the hardest time keeping interest rates manageable.