From December 2015 until now, the Federal Reserve’s target interest rate has increased eight times. Although rate hikes tend to be a sign of a strong economy, they’re not so fun if you’ve got a variable rate on your student loans.
Unlike fixed rates, variable rates fluctuate over time, typically in accordance with the London Interbank Offered Rate (LIBOR), a popular benchmark for interest rates. So even though your rate might have started out low, it could rise over the life of your loans.
If you’ve got a variable rate on one or more of your loans, here are four tips on what to do if it keeps going up.
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1. Remember that a rising rate might not cost you more overall
When borrowing or refinancing a private student loan, note that variable rates currently tend to start lower than fixed rates. As a result, choosing a variable rate could mean you pay less interest at the beginning of repayment, when your student loan balance is at its highest.
Even if your variable rate rises over time, you probably won’t see a drastic increase all at once. Since 1994, for example, the Federal Reserve’s benchmark rate target has never risen by more than two percentage points in a year. So if you’re planning to pay off your student loans within a few years, you probably shouldn’t stress too much about a rising rate.
Even if you see a few hikes throughout the life of your loans, you could still end up spending less than you would if you’d chosen a higher fixed rate at the beginning.
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2. Find ways to pay off your variable rate loans faster
With rates currently forecast to keep rising, consider paying off your student loan ahead of schedule. By throwing extra payments at your loan, you could shave years off your repayment plan. Most lenders don’t charge any penalty for prepaying your loan, so the main challenge is coming up with the extra money each month.
You might create a budget and find ways to reduce your spending. You could apply to jobs that offer a higher income, or even set up a side hustle to supplement your earnings. Whatever changes you can make to free up more of your money could mean getting out of debt ahead of schedule.
And if you’ve got both fixed-rate and variable-rate loans, consider using those extra payments to target the variable-rate ones first. That way, you can pay off those debts before rates rise too much and feel confident that your fixed-rate loan payments will stay the same in the years to come.
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3. Refinance to a fixed-rate student loan
If you can’t pay off your variable rate loans quickly, you might instead consider switching to a fixed rate through student loan refinancing.
When you refinance, you get a new loan from a bank or other lender and use it to pay off one or more of your old loans. Just as you choose your rate type when you borrow private student loans, you also choose between a fixed and variable rate when you refinance.
You can also select new repayment terms, typically between five and 20 years. A shorter term could increase your monthly payment, while a longer term will reduce it. Before choosing, student loan refinancing calculator to crunch the numbers and find a repayment plan that works with your budget.
Not only can refinancing switch you from a variable to a fixed rate, but you might also qualify for a lower interest rate than what you have now. If you have strong credit and a stable income, or can apply with a cosigner who does, you could get competitive rates on your refinanced student loans.
What’s more, there’s no limit to the number of times you can refinance. If rates go down or your credit score goes up, it might be to your benefit to refinance for even better terms. With this strategy, you could eliminate the risk of a variable rate and get one step closer to achieving your debt payoff goals.
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4. Speak with your lender about lowering your rate
Along with switching to a fixed rate through refinancing, you might check to see if your lender can help you reduce your rate.
Most lenders, for instance, offer a 0.25% rate discount if you set up autopay on your student loans. Some also offer an additional discount after a few years of on-time repayment (though this perk has become rare in recent years.)
And although it’s not guaranteed, you could try negotiating with your lender for a lower rate. At the very least, you can find out if your lender offers any special discounts or flexibility when it comes to repayment.
Reaching out to your lender or loan servicer is especially important if you’re struggling to pay your bills. Rather than going into default, alert your loan servicer to your situation and see what they can do.
That way, you should be able to adjust your payments, avoid default and save your credit score.
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Don’t panic if your variable interest rate rises over time
Although variable rates can — and likely will — rise over time, that doesn’t mean choosing one over a fixed rate is necessarily a bad idea. For example, if you can pay off your debt quickly, then a variable rate might be the better choice.
And if you can’t, don’t stress if your rate increases every once in a while, as it might still save you money in the long run. To make sure, crunch the numbers on your debt to see how much a rate hike will cost you.
And if a fixed rate looks like a much better deal than your current variable rate, consider refinancing for new terms. Rather than feeling stuck, check in with your student loans every once in a while. Your circumstances are sure to change in the years after graduation, so your approach to paying off debt should, too.
By staying on top of your debt, you can find the repayment strategies that work best for you.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
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