Q: I heard the Federal Reserve just increased interest rates. Could that affect my student loans and credit card debt? And how can I pay them down faster?
For years, the Federal Reserve (aka “the Fed”) kept interest rates near zero in an attempt to boost the economy after the 2008 market crash—and was reluctant to raise them. But it finally did so in December 2015, again a year later, and on March 15, when the Fed announced another increase of .25 percent—bringing the overnight funds rate (at which banks lend to each other) to a target range of 0.75 percent to 1 percent. It also indicated that there would likely be two more increases in 2017.
Will this actually affect you and your loans? It depends.
Many borrowers have fixed-rate, federal student loans, which means the interest rate stays the same—no matter what the current rates are or how they change. On the other hand, if you have private loans (from a bank or credit union) with variable rates, it’s possible you’ll see an increase, based on the terms of your loan.
The same goes for credit cards. While fixed-rate credit cards—which have become increasingly scarce in recent years—aren’t directly tied to market indexes, variable-rate cards are. They typically follow the Prime Rate, which is correlated with the newly increased federal funds rate. So if your credit card has a variable APR, you can expect to pay more, but the hike should be minimal.
Whether the rate hike applies to you or not, it’s always a good idea to pay off your loans as fast as possible. There are several ways to lower your interest rates to speed up your progress:
- Research balance transfer cards, which offer lower—or even 0 percent—interest rates. Be careful, though, because it may only last for a limited time. Read the fine print, and make sure to pay off your balance before the deadline. In some cases, failing to do so can result in having to pay back-interest. Be sure to check if there’s a balance transfer fee, too, which can be as much as 3 to 5 percent of the balance.
- Consider refinancing. Services like SoFi and Earnest can help you refinance or consolidate your student loans or roll over your credit card debt into a lower-interest personal loan. Knocking your rate down a few percentage points can save you a lot over the life of your loans, especially if you’re attacking a big balance.
- Make paying down debt a priority. As your balances decrease over time, you’ll owe less on your debt. Create a budget and follow it closely. Then find ways to earn more, like picking up a side job for a few months and funneling all that income toward your debt. You’ll be amazed how much better you’ll feel after you’re debt-free and able to focus on other financial priorities.
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Alan Moore, MS, Certified Financial Planner, is the co-founder of the XY Planning Network and is the Champion of NextGen at Abacus Wealth Partners, a fee-only RIA and financial planning firm managing over $1.5 billion.
December 20, 2016