How does high inflation impact student loan borrowers?

The basics

High inflation can be both good news and bad news for student loan borrowers. As of March 2022, inflation was at 8.5%, decreasing slightly to 8.3% in April. This is a 40 year high, which means your dollar is worth less now than it was a few years ago. For student loan borrowers, this can mean that their loan is worth less, but they also might have a harder time repaying it. If you have multiple loans, try a  loan consolidation calculator to see how much you could save by merging your loans together.

Due to the COVID-19 pandemic, student loan repayments have been on pause, but this is set to expire at the end of August, meaning payments will need to start being made in September. There is some speculation that the pause will get extended through the midterm elections, or that President Biden will cancel some or all of the federal student loan debts. Whatever the case, it is important to be prepared for what may come.

The good news and the bad news

In order to combat inflation, the Federal Reserve increases interest rates on loans. Luckily for borrowers with existing fixed rate loans, like student loans, this hike in interest rates will have no impact on them. However, for new students taking out loans, this can be very difficult. The interest rate is locked in for the lifetime of the loan, meaning borrowers for the fall semester will have the higher interest rates long term.

Due to inflation, the value of the loan decreases, so it can be easier to pay off as long as wages are growing as fast as or faster than inflation. However, this is largely not the case. If wages are not growing as fast as inflation, then loan borrowers have less spending power, even if their loan is valued less. Also to note, during times of high inflation, costs of goods go up, making the day to day more expensive. If wages are not keeping up, it is more difficult to purchase things like groceries and clothes, which in turn makes it difficult to make student loan payments.

If you hold a private student loan with adjustable rates, then you might have already noticed your interest rates going up. Luckily, as inflation subsides, the rates will go back down. Many borrowers are worried about making payments when the freeze is over. Inflation has made the cost of living increase rapidly and wages are not supporting this shift, so there is no more room in the budget to make these payments.

The bottom line

Inflation is a complex topic and impacts many facets of life, from purchases at the grocery store to the value of student loans. Although student loans are technically devalued because of inflation, big jumps in interest rates for new borrowers, increase in cost of living, and slowly increasing wages make it difficult for borrowers to repay these loans. Consolidation loans can be a great way to consolidate multiple federal loans into one, with one monthly payment and different loan terms.