Live: Interest Rates and Your Wallet
The US economy is showing strong signals right now, so the Federal Reserve (aka the Fed) isn’t sure if it’s ready to lower interest rates. While three rate cuts were expected for 2024, we’ve only seen two so far.
Yap yap. So what?
Well, this affects you—especially if you’ve got student loans or are thinking about taking one out. Here’s how:
If the Fed decreases interest rates at a slower pace, then borrowing for student loans may remain more expensive.
The impact will depend on the types of loans you have.
Federal student loans: Most have fixed rates, so if you are only relying on these then you can rest easy.
Private or variable-rate loans: These could stay pricey if the Fed slows down rate cuts.
Essentially, interest on loans will stay higher for new loans and variable rate (as opposed to fixed rate) loans.
Student loan interest rates can rise or fall for other reasons too, but the Federal Funds Rate is one factor that can hit your wallet directly. So, if grad school or private loans are in your future, keep an eye on this!
Learn: How Much Do You Spend On Interest?
Whether or not your romantic interest likes you will always be a mystery, but your interest rates are crystal clear—and they can cost you big.
I like to think of interest as the cost of borrowing money. And these prices vary depending upon the type of loan you get.
Credit cards are notoriously pricey loans (known as high interest-debt). If you pay off your statement balance in full every month then there is no interest. However, if you fail to pay off your credit card, interest rates can be as high as 20 or 30%. YIKES!
Other loans are considered low interest, such as home loans (mortgages) and student loans. These loans have lower interest rates of around 7% and 5% respectively right now.
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To figure out what an interest rate actually means though you will have to do some math.
Math Moment!
If you have a 5% interest rate on a $10,000 loan, then you will have to pay 0.05 times $10,000. This equals $500 in interest on the loan. This helps explain why credit card interest is considered high. Because $10,000 at a 30% interest rate would mean you owe $3,000!
Things get more complex if the loan is longer or shorter than a year. I won’t go super in depth here, but one thing to note with student loans is that if you don’t pay off your loan interest, it gets added to the interest calculation the year after.
What does this mean?
Say you have a 5% interest rate on a $10,000 loan like before. But in this case you don’t pay off the interest in your first year. Then, in the next year you will have 5% interest on a $10,500 loan ($10,000 plus your $500 in interest the last year), which is $525!
This means the money you owe will grow, and it will grow at an increasing rate. So your interest rate really matters!
Launch!
Your mission, should you choose to accept it:
Have student loans? Look up your interest rate and calculate how much you’re spending on it this year.
Considering a credit card? Check the APR (Annual Percentage Yield —> another term for interest) and figure out what you’d owe if you don’t pay off the balance.
Or, respond to this email about anything you are still confused on with interest rates and I’ll try to explain it better.
Knowing these numbers will help you plan for all your expenses—not just food, rent, and that giant teddy bear Squishmallow you want to buy (just me?).
If you think about these numbers, then your finances won’t be a surprise, they’ll just be yours to optimize.
And maybe then you can treat yourself to a teddy bear Squishmallow. You deserve it ;).
—Ben Brosnahan
