The Impact of Inflation on Student Loan Debt

NEW YORK – March 25, 2022 – (

iQuanti: Inflation may seem abstract, but it has a significant impact on almost everyone, regardless of their financial situation. Although inflation usually happens year-on-year in the background, particularly high inflation has been in the news recently, and it can be worth preparing for its impact. The truth is that inflation not only impacts the prices of consumer goods and investment tools, but also long-term debts such as student loans.

During inflation, the price of goods and services increases and purchasing power decreases. There is a significant correlation between student loan prices and the national inflation rate, largely because Treasury bond interest rates are raised.

The Congressional Budget Office uses the formulas below to set the APR for federal student loans, which is renegotiated each May:

  • 10-year Treasury rate plus 2.05% for direct undergraduate loans
  • 10-year Treasury rate plus 3.6% for direct graduate loans
  • 10-year Treasury rate plus 4.6% for direct loans PLUS

This formula remains consistent, but the 10-year Treasury rate varies. For loans disbursed between July 1, 2021 and July 1, 2022, the 10-year Treasury rate is 1.684%.

Debt and interest rate during inflation

Believe it or not, some student borrowers celebrate inflation — and if you have a fixed interest rate on your loans, you might join them. Since many student loans have long-term fixed interest rates of 10 to 30 years, they are not susceptible to market fluctuations like variable rate loans. Borrowers who choose to refinance their student loans often offer fixed rate refinancing options.

The value of loans declines as rising inflation devalues ​​the dollar. Loans taken out before inflation are worth less when repaid today.

While this sounds great, you will only benefit if your wages keep up with inflation, as household expenses will also increase. If inflation increases more than wage rates, consumers lose purchasing power and the ability to repay debt decreases.

Can refinancing save money?

If your loans are variable rate rather than fixed rate, the advantage of holding debt through inflation may slip away, but it is possible to lock in a fixed rate with a refinance.

Under the right circumstances, student loan refinancing can save money and have other benefits. Refinancing can lower your interest rate, convert a variable rate loan to a fixed rate loan, consolidate loans for a monthly payment, or free up a loan co-signer.

Student loan interest rates in 2021 were among the lowest ever. If you have the option of refinancing at a much lower interest rate than your current loan, this can be a great opportunity to get a fixed rate.

On the other hand, you may lose the benefits and protections of the original loan. People who owe federal student loans have enjoyed a long pause in interest and payment on student loans thanks to COVID-19, and some may feel drawn to the debate over the potential cancellation of part of federal student debt. It is important to understand the potential trade-offs before refinancing.

Reasons to refinance a student loan include:

  • Benefit from a lower interest rate
  • Establish a fixed rate rather than a variable interest rate
  • Reduce the number of monthly payments
  • Release of a co-signer

The essential

There is no hard and fast rule as to when to refinance, and the tumultuous economic circumstances of the pandemic have yielded significant pros and cons to consider. For those who have trouble making payments or want lower monthly payments, the best choice may be to stay with a federal program. If you are able to repay your loan more aggressively, a timely refinance could provide a unique opportunity to capitalize on inflation before interest rates rise in the future.

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The Impact of Inflation on Student Loan Debt

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