Private student loan borrowers can be stuck watching their debt mount

  • The Federal Reserve raised interest rates again on Wednesday, making all types of borrowing more expensive.
  • That means student loan borrowers with private loans could see interest rates rise and their balances grow.
  • This comes as Biden implements his federal debt write-off, which private borrowers do not have access to.

Those with federal student debt got some good news last month when President Joe Biden announced he was waiving $10,000 to $20,000 for federal borrowers who earn less than $125,000 a year.

However, private borrowers are not eligible for government assistance, and the situation may worsen for them.

That’s because the Federal Reserve raised interest rates again this week by another 0.75%. Private student loans can have fixed or variable interest rates, and as the Fed raises rates, those with variable interest rates will end up paying more. For some, this can lead to a spiral known as interest compounding, in which accrued interest is added to the original loan balance and future interest accrues on top of that larger amount. Biden unveiled a plan to limit capitalization and prevent cases like Daniel Tapia, who borrowed $60,000 in private loans but now owes $86,000, even after two decades of repayment.

All federal student loans taken out in 2006 or later have fixed interest rates, meaning they never change while you have the loan. This means that existing federal loans remain unchanged, although new loans taken out after the increase will be subject to a higher fixed rate. Also, the current federal student loan payment freeze extends through the end of the year, so no interest will accrue until then.

However, the exact increase in private loans with variable interest rates depends on the benchmark. As of this week, average fixed rates for private student loans ranged from 3.22% to 13.95% and from 1.29% to 12.99% for variable rates, according to Bankrate. Unlike a federal loan, the interest rate a person receives on a private student loan is also determined by credit score or financial history, as with a car loan, meaning the exact monthly payment is unknown to many.

While refinancing into a private student loan may make sense for some borrowers — it could offer lower monthly payments at a lower interest rate — it could also block their eligibility for Biden’s federal aid.

Insider previously spoke with May, a private student loan borrower who asked not to be named for privacy. She said that while she has both federal and private loans, most of her balance is private, and she was frustrated that she couldn’t get more help.

“Relief is just a tiny drop in the bucket and I’m really hoping for more,” May said. “Perhaps this will open up a discussion about private loan cancellations or a future where the federal government can actually regulate private loan companies and lenders.”

She said the high interest rates have been especially difficult for her to manage her student loan balances — a problem expressed by both private and federal borrowers because interest charges can make it difficult to touch the original loan balance.

While borrowers with private loans cannot qualify for Biden loan forgiveness, those with commercial loans through the Federal Family Education Loan (FFEL) program may have a chance. Under current Department of Education guidance, those borrowers can consolidate their loans in the federal Direct Loan Program to apply for Biden aid when the application becomes live in early October, and it is “being evaluated” whether to make those borrowers automatically eligible without requiring consolidation.

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