Pause in Federal Student Loan Payments Set to Continue, Private Loan Interest May Rise
The pause on student loan repayments could be extended again. Companies that handle student loans for the federal government are being told not to send new bills.
In March 2020, the government suspended loan repayments and set interest rates at zero for eligible federal student loans. Former President Trump and President Biden have both extended the deadline over the past two years.
The loan repayment relief allowed Brenna Warren to focus on repaying her private loans.
“I still have about $10,000 in private loans and $50,000 in government loans,” she said.
The 29-year-old intensive care nurse took out loans to complete her undergraduate degree in psychology. She completed the program in three years, which saved her money, but she still graduated with student debt in 2014. Warren used her degree for a few years before continuing. her master’s degree in nursing. She worked full-time while completing college, but had to take out additional loans.
The pause on federal loan repayments is set to expire Aug. 31. Warren said it would double his monthly payment to $1,500, at a time when inflation is at its highest level in 40 years.
“That probably means, what foods am I buying at the grocery store this week versus can I afford a tank of gas to get to work to pay all these bills?” she says. “Gasoline, food, rent, what are you doing? Because obviously the loans will default and you’ll end up getting calls from collectors if you don’t pay.
Congress sets the fixed interest rate for federal student loans each year, which takes effect in July. Students taking out new loans starting this month will pay a higher rate than students who took out loans in 2021 and 2020.
Private loan interest rates have more variability.
Warren has refinanced its fixed-rate private loans four times since 2016 and benefited from lower interest rates during the pandemic.
“Fortunately, I have people in my life who are financially savvy, so I refinanced my private loans, but if I had continued to pay at the interest rate I originally charged them, I probably wouldn’t have didn’t even make a dent,” Warren said.
Others who have variable rate private loans can now also face an increase. The Federal Reserve is expected to raise interest rates again on Wednesday.
“There are those privates that haven’t been paused and some of them will fluctuate quite a bit when the Fed changes interest rates,” said Tyler Schipper, an economist at the University of St. Thomas. “It will affect these rates, but it may take a few months for it to be fully reflected in these. This will increase these variable rate loans.
He explained that credit card debt will also be affected by the increase in interest rates.
“They’re seeing their credit card interest rates go up along with their student loan interest rates, so it’s a double whammy for some of these students,” Schipper said.
He explained that the Federal Reserve is unlikely to consider private student loans as a factor as it weighs on whether to raise interest rates this week.
“Their argument would be that the same students who are struggling to repay their student loans are also the same students who are struggling to buy gas, to heat their homes, to buy enough food for their families and that if there are two dragons to slay, the inflation dragon might be the one to chase right now,” Schipper said.