Loans

Here's What High Inflation Means for Student Loan Borrowers

Most borrowers will feel inflation's sting if they have to start repaying student loans this September.

Sarah Tew/CNET

Inflation hit a 40-year record high of 8.5% in March and slid down slightly to 8.3% in April. In periods of high inflation, like right now, the value of your dollar is worth less. You may have also heard there's an upside -- that your student debt is now also worth less. And while this is technically true, it's not the whole story.

The current pause on federal student loan repayments has been extended to August 31, marking the sixth extension since the beginning of the pandemic. While this freeze has offered borrowers temporary relief, when repayments begin, inflation will play a key role.

How exactly does inflation impact your student loan debt? We sat down with student loans expert Mark Kantrowitz, author of How to Appeal for More College Financial Aid, to discuss the specifics of what inflation means for student loan holders.

What are inflation rates and interest rates?

Inflation rates are a measure of the purchasing power of money. The Federal Reserve, the central banking system in the US, is tasked with keeping inflation around 2% each year, the standard yearly growth rate for the economy. When inflation rises past this 2% mark too quickly, as it has in the past few months, the prices of goods and services rise, requiring more money for everyday essentials and housing. This indicates a period of high inflation.

For example, in 2018, you could buy roughly 2 gallons of milk for $6. Today, however, that same amount of money will only buy you roughly 1.5 gallons of milk

Interest rates represent the cost of borrowing money. An interest rate is the amount that a lender charges a borrower, which is a percentage of the total loan amount. For example, if you borrow $1,000 with a 5% yearly interest rate for a duration of four years, your total interest costs would amount to $105.41 over the four-year term.

As inflation increases, the Fed raises the federal funds rate, which is the rate it costs banks to lend to one another. Banks then respond by increasing consumer interest rates on loans and other financial products. The Fed does this to contain inflation, making it less enticing for consumers to borrow money, which in turn helps balance the scales of supply and demand, stabilizes the economy and theoretically, lowers the inflation rate.

How inflation impacts your student loans

Rate increases won't impact existing fixed-rate student loans, like federal loans. Private borrowers with adjustable-rate mortgages, however, may see their rates increase.

In addition, during times of high inflation, the value of fixed-rate student loans also decreases. "Inflation dictates that a dollar ten years ago is worth more than a dollar today. So, as long as your wages are rising along with inflation, the debt for a loan borrowed in the past will hold less value today," said Kantrowitz. 

Essentially, if your wages rise alongside inflation at the same rate or higher, it can make paying back your debt a little bit easier. However, average wage increases are currently not keeping up with inflation. As of March 2022, wages have only increased 5.6% over the past 12 months. This means most Americans currently will not benefit from devalued student debt.

Here's a breakdown on how inflation might impact you depending on your loan type and whether or not you're still in school:

If you hold federal student loans: 

Federal student loans are fixed-rate. This means that the interest rate will stay the same over the life of the loans. 

If you hold a federal student loan, inflation could work in your favor if your wages rise alongside the inflation rate, as it will devalue your debt. 

However, if, like most Americans, your wages have not increased at the same rate of inflation and rising prices are stretching your budget even thinner, this devalued debt won't help you -- and you might even find it more difficult to repay your loans.

If you hold private student loans: 

Private student loans can be either variable or fixed rate. For those with fixed-rate loans, you don't have to worry about inflation increasing the interest rates of your existing student debt. But if you have adjustable-rate loans, your interest rates could rise -- and may have already.

As inflation rates go up, interest rates usually follow. This means variable-rate private loans holders could see higher interest rates in the future.

If you're a new borrower in 2022:

Federal student loan interest rates reset annually on July 1, and Kantrowitz noted that both federal and private student loan interest rates will be higher for the 2022-23 academic year. The new federal student loan interest rates for the 2022-23 school year were just released this week, and are as follows:

  • Undergraduate loans: 4.99%
  • Graduate Direct Unsubsidized loans: 6.54%
  • PLUS loans: 7.54%

This is a big jump up for students. For reference, last year an undergraduate federal student loan had an interest rate of 3.73% -- around 1.25% lower than the rate for the coming academic year. 

Will inflation impact loan repayment after the federal payment freeze is over?

Kantrowitz said he predicts that the student loan repayment pause will be extended again, with renewed payments beginning after the 2022 midterms. However, whether or not the repayment freeze is extended again may hinge on the White House's decision on widespread federal student loan forgiveness (President Joe Biden is expected to make a decision on this in the coming weeks). Since anything could happen, it's best to prepare for repayment now, so you're not surprised if loans are due again in September. 

For many, repaying student loan debt in a time of high inflation is a real concern. According to the Student Debt Crisis Center, out of 23,532 borrowers, 92% of those who were fully employed are concerned about affording payments in the face of skyrocketing inflation.  

"I personally have not been able to save for student loan repayment, and I don't think I could have given the growing disparity between wages and the national cost of living," said Jonathan Casson, a recent graduate of Cornell University.

If you're worried about repaying your student debt, here are some tips to plan ahead:

How can you prepare to repay federal loans?

1. Look into income-driven repayment plans

The government offers four income-driven repayment plans that can help make monthly payments more affordable for borrowers who need to keep payment sizes small. Each plan caps payments at between 10% to 20% of your discretionary income (income after taxes and necessities are paid), and forgives your loan balance after 20 or 25 years of payment. Eligibility for these plans is dependent upon family size and discretionary income. 

2. Refinance private loans now

With many interest rate hikes expected this year, refinancing any private adjustable-rate student loans you hold into fixed-rate student loans could help you save hundreds to thousands in interest -- and may even reduce your monthly payment. You should refinance as soon as possible, though, if you want to lock in the lowest possible fixed-interest rate.

3. Take a close look at your budget

If a student loan payment is not feasible with your current budget, see if there are any ways to cut expenses or pay down high-interest debt now to free up funds come September. While adjusting your budget may seem daunting, there are multiple resources and apps to help you calculate and identify expenses you can reduce or eliminate. 

4. Consider a side hustle

A part-time gig outside of your primary job can help supplement your income as inflation skyrockets. Currently, about one-third of American adults have a side hustle, according to a 2021 Harris Poll commissioned by Zapier. Another source of income can help bridge an income gap in your budget and offer you a bit of breathing room.