Us loan Interest rate
There has been a lot of talk in the media about the expected Federal Reserve interest rate increase. Nobody is sure when it is going to happen or how quickly it will go up, but experts seem to agree that interest rates will increase soon.
How will this affect my student loan interest rate?
To many of us, it won’t. If you already have a federal student loan or your private student loan has a fixed-interest rate, then this rate hike will have no effect on your interest rate. In a fixed interest loan, your interest rate is set. Your rate cannot be changed by your bank or the government, no matter what happens to interest rates in general.
If, however, your loan is from a private lender, then it is quite possible that you have a variable rate loan. If this is the case, then your interest rate is determined by market interest rates. This would mean that a change in global interest rates could increase or decrease the amount that you owe. Unfortunately, interest rates are so low at the moment that they’re more likely to rise than fall.
What is the “market interest rate” and how does it relate to my interest rate?
Variable rates, also called floating or adjustable rates, are normally tied to a reference rate, also called a benchmark rate. Arguably the most influential benchmark for commercial loans is LIBOR, the London Interbank Offered Rate, which is the industry standard for student loans. Normally, variable commercial loans, such as student loans, are calculated by adding percentage points to the benchmark rate. Therefore, as the benchmark goes up or down, so too does the interest rate on your variable student loan.
What is the Fed?
While the Fed does not have any direct control over LIBOR, it is able to influence any benchmark rate. But in order to understand how the Fed does this, it is important to understand exactly what the Fed is.
The Federal Reserve System is the central banking system of the United States. It is tasked with helping the United States government regulate the economy by deciding U.S. monetary policy. This means that it has the power to manipulate the supply of money in circulation, in this case the dollar, in order to promote economic growth, fuel employment, and control inflation. Recently, it has also taken on the responsibility of regulating the banking industry and ensuring that America’s financial system remains stable.