High Inflation Is Bad News if You Have Student Loans. Here’s Why

This story is part of Recession Help Desk, CNET’s coverage of how to make smart money moves in an uncertain economy.

Student loan forgiveness is top of mind for most borrowers. But if you’re not eligible for President Biden’s recent student loan forgiveness plan or if you’ll still have a balance come January, inflation may make your student loans even more expensive.

Despite a slight slowdown in July, prices continued to climb, leaving inflation close to record highs. And if you have student loans, there’s another reason to be worried.

Generally, a period of high inflation, like we’re experiencing right now, makes it harder for borrowers to repay existing debt and can continue to drive up rates on private student loans.

When the pause on federal student loan payments expires at the end of December, if inflation is still high, it may be more difficult for borrowers to restart monthly student loan payments.

Here’s everything you need to know about how inflation impacts your student loan debt. 

Inflation and student loans

The Federal Reserve has raised the federal funds rate four times in an effort to slow rampant inflation. But while prices haven’t dropped from record-high levels, these hikes in the federal funds rate have indirectly led to more burdensome interest rates on consumer products, such as credit cards, mortgages and loans.

The Fed’s rate increases won’t impact any fixed-rate student loans you currently hold, such as federal loans. But private loans with adjustable rates (interest rates that can rise and fall along with the economy) may see their rates increase, making them more expensive for borrowers to repay.

If your wages were to rise alongside inflation at the same rate or higher, it could make paying back your debt a little bit easier and counter higher interest rates. “Inflation dictates that a dollar 10 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 Mark Kantrowitz,  student loan expert and author of How to Appeal for More College Financial Aid.

However, average wage increases are not keeping up with inflation. As of June, wages have only increased 5.1% over the past 12 months, making it more difficult for borrowers to chip away at their debt on top of covering daily expenses.

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 always fixed-rate loans, so the interest rate will stay the same over their lifetime.   

If you hold a federal student loan, inflation could work in your favor because it effectively devalues your debt, but that only helps if your wages kept up with or surpassed the inflation rate. 

If, like for most Americans, your wages haven’t increased substantially and your budget is stretched even thinner than before, this devalued debt won’t help you — and you might even find it more difficult to repay your loans when the federal loan repayment freeze ends.

If you hold private student loans: 

Private student loans can be either variable or fixed rate, and payments for either type of private loan have not been on hold during the pandemic. 

For those with fixed-rate private loans, the interest rate of your existing student debt won’t go up. However, since inflation is making everyday purchases pricier, you might find yourself with less cash overall to set aside for paying off debt.  

If you have adjustable-rate loans, your interest rates could definitely rise — and may have already. As inflation rates go up, interest rates usually follow. Variable-rate private loans holders could see even higher interest rates in the future.

If you’re a new borrower this year:

Both federal and private student loan interest rates will be higher for the 2022-23 academic year, Kantrowitz said. The new federal student loan interest rates for the 2022-23 school year 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. 

Private student loan rates have also increased. Fixed-rate private student loans range from 3.22% to 13.95%, and variable-rate private student loans range from 1.29% to 12.99%, according to Bankrate, which is owned by the same parent company as CNET.

Will inflation make loan repayment more difficult after the federal payment pause ends?

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.

While Biden’s $10,000 to $20,000 in federal loan forgiveness will help some borrowers eliminate their debt entirely or reduce it significantly, others with higher debt balances may struggle to afford monthly payments. If you’re worried about repaying your student debt when the pause expires, here are some steps to consider now:

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. Currently, each IDR plan caps payments at between 10% and 20% of your discretionary income (income after taxes and necessities are paid), and forgives your loan balance after 20 or 25 years of payment. However, under Biden’s newly proposed IDR plan, payments would be as low as 5% of your discretionary income, which could lower your monthly costs.

For example, if you currently are on an IDR and your monthly discretionary income is $1,500, you could pay as much as $225 per month (20%). However, under the new IDR, this could be reduced to $75 per month, saving you $150 a month or $1,800 per year.

2. Check if you’re eligible for additional loan forgiveness

Whether you’re eligible for the recently announced federal student loan forgiveness or not, there are other forgiveness programs to consider. 

If you’re a teacher, first responder, public servant or government worker, you may be eligible for federal student loan forgiveness under the Public Service Loan Forgiveness program. You must be in a qualifying position, hold eligible federal student loans and have made 120 qualifying payments to receive forgiveness (each paused month during the federal payment freeze counts as one qualifying payment). 

The PSLF has temporarily expanded its benefits to include forgiveness for more federal loan types and IDR plans, and could make some applicants now eligible who had been denied loan cancellation in the past. The expanded forgiveness waiver application is due by Oct. 31, so it’s important to find out if you’re eligible now. In some cases, you may need to consolidate your loans into federal Direct Loans, a process that can take 45 days. 

While your monthly payment may not change if you haven’t reached the 120 payment goal yet, you’ll at least be a step closer toward student loan forgiveness.

3. Refinance private loans

With many interest rate continuing to rise throughout this year, refinancing your private adjustable-rate student loans into fixed-rate student loans sooner could help you save hundreds to thousands in interest — and may even reduce your monthly payment. 

You should only refinance if you receive better payment terms or a lower rate. Otherwise it generally won’t be worth the hassle and could cost you more in interest.

4. Examine 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. 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. 

5. Consider a side hustle

A part-time gig outside of your primary job may help supplement your income as inflation skyrockets. Currently, 31% of American adults have a side hustle, according to a 2022 Bankrate survey. Having an additional source of money can help bridge a gap in your budget and offer you a bit of breathing room.