How Inflation Affects Student Loan Borrowers

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Have you come across the news or any skimmed news outlet stating about inflation? If you haven’t, this is the perfect platform to learn about it. But first, if you have an existing student loan, you need to know that this inflation will affect you as a borrower. This is the reason for this blog post on how inflation affects student loan borrowers. Everything you need to know about this rise. In May 2022, the U.S. inflation rate reached 8.6%.

How Inflation Affects Student Loan Borrowers

Therefore, every person in the country will pay more for goods and services like food, cars, gasoline, and housing. Since this inflation will be resuming, a lot of borrowers are getting worried. This is because one of the goals of the Fed is to maintain and manage inflation, and they are working to keep inflation at 2%.

If it ever passes this level, the Fed will begin to work to control it. One of the steps to controlling inflation is increasing the federal funds rate. These are the rates banks use to give to one another for those who are not aware. This will also cause an increase in the amount of debt owed to borrowers by lenders.

Increasing Rates for Federal Student Loans

The rates for federal student loans have increased from March, May, June, July, September, November, and December 2022 to January 2023. What’s more, the rate increase was said to be a way to reduce and fight inflation. The central bank may also increase rates more often to improve things in the economy.

Direct subsidized loans and direct unsubsidized loansUndergraduate4.99%5.50%
Direct unsubsidized loansGraduate or professional6.54%7.05%
Direct PLUS loansParents and graduate or professional students7.54%8.05%

How Inflation Affects Student Loan Borrowers

There are different ways that inflation affects the borrowers of student loans. But I will be showing you the most significant ways this can affect you, both positively and negatively. So, keep scrolling:

  • The interest rates may increase on the existing loan.
  • Getting new loans may be more costly.
  • Your debt may be cheaper.

The Interest Rates May Increase on The Existing Loan

This is the most common and important aspect to pay attention to if you have an existing student loan. The inflation will cause the interest rates on the loan to increase as well. However, keep in mind that the increased interest rate varies from lender to lender.

Thus, if you have a fixed-rate loan, like a private loan or a federal loan, the interest rate is controlled by the length of the loan. In the meantime, if you want to change it, one possible way is through debt refinancing.

Getting New Loans May Be More Costly

One of the effects of inflation on a student loan is that getting or applying for a new loan may be more expensive. So, if you are a parent borrowing for a student or you are a college student, prepare yourself for the rising rates.

This announcement about the increase in rates for federal loans was made by the Department of Education. From last year, the increase in rates for undergraduate students was 33%. Nevertheless, if you want to get a lower rate, you can add a co-applicant to your private student loan application.

Your Debt May Be Cheaper

Not only do the lenders benefit from inflation, but the borrowers also do,in some cases. In the same manner, if you have a fixed-rate loan, your debt will become cheaper and less expensive with a high inflation rate, unlike when you just applied for it.

For instance, $30,000 in debt on a student loan can be equal to $23,500 after 5 years if the average annual inflation rate is 5%. This makes your debt cheaper and more affordable.

What to Do If I Cannot Afford to Make Payments

Since you are aware that inflation will not favor your existing student loan debt, you must be looking for a way to pay it back, right? But if you have run out of options, do not worry. I would personally suggest a credit card as a temporary solution to cover all the expenses.

Even so, this can cause harm to your financial health as well as your credit score. Besides, credit cards have high interest rates compared to other lending sources. This will cause your debt to become deeper.

So, if you are ready to take the risk, here are some alternatives that you can consider:

  • Forbearance or deferment.
  • Income-driven repayment.
  • Loan consolidation.
  • Debt refinance.
  • Reduce your spending.

You can also check out different alternative payment plans as well. Considering a side hustle is another good idea.


How does inflation impact student loan interest rates?

Inflation can impact student loan interest rates, causing them to rise, which in turn affects borrowers by potentially increasing the costs of borrowing.

Inflation influences interest rates, potentially causing them to rise and having an adverse effect on student loan borrowers. If the inflation rate exceeds the fixed interest rate on student loans, borrowers may end up paying more in real terms over the life of the loan.

Will inflation affect the value of student loan debt?

Yes, inflation can erode the value of debt over time. As prices rise, the real value of the debt decreases. However, this effect may be offset if interest rates also rise due to inflation.

How does inflation affect repayment plans for student loans?

Inflation can affect the affordability of loan repayment plans. If wages do not keep pace with inflation, borrowers may find it more challenging to make payments, particularly if their income remains stagnant while prices rise.

Does inflation impact the overall cost of education and future borrowing?

Yes, inflation can lead to higher tuition fees and other educational expenses, increasing the need for borrowing. This can result in higher debt burdens for future students.

Can inflation influence government policies regarding student loans?

Inflationary pressures may prompt policymakers to reassess student loan programs and interest rates. They may adjust policies to mitigate the impact of inflation on borrowers or to address rising educational costs.

Are there strategies to mitigate the impact of inflation on student loan debt?

Borrowers can explore options such as refinancing at lower interest rates, choosing income-driven repayment plans, or making extra payments during periods of low inflation to reduce the overall cost of the loan.

How does inflation affect the economy and job market for recent graduates?

Inflation can impact the economy and job market, potentially affecting the availability of jobs and starting salaries for recent graduates. High inflation rates may also increase the cost of living, making it more difficult for graduates to manage loan repayments.

Should student loan borrowers consider inflation when planning their finances?

Yes, borrowers should consider inflation when planning for loan repayment and budgeting. Understanding how inflation can affect interest rates, wages, and the overall economy can help borrowers make informed financial decisions.