It has been a couple weeks since the announcement by the Federal Reserve that the Federal Funds Rate would be increased by a quarter percent to 0.50%. This may not sound like a lot, and in practical terms, it is not.
Instead, it should perhaps be thought of as a symbolic gesture. It is the beginning commitment by the Fed to return interest rates to more historic levels. However, the larger question still remains: At what pace will they continue to raise rates?
To begin conceptualizing this question, we shall review where interest rates have been over the last half century.
The above graph shows where the Federal Funds rate has been since the early 1950’s and we notice a few things. The first trend is that interest rates have been on a steady declining trend since the 1980’s, when then-Chairman Paul Volcker raised rates to thwart inflation. The second trend is that when interest rates have been raised after a relatively stable period, they tend to increase rather sharply. The final observation is that in the last seven years, we have seen the lowest interest rates in recorded history, which simultaneously prevailed for the longest period of time. This may lead you to think that we are due for a very sharp increase in rates soon. Despite the natural thought, we shouldn’t jump to any quick conclusions.
The current Federal Reserve Chairwoman, Janet Yellen, has indicated an initial plan to raise rates as much as 0.75% in the next year, but with one major caveat. All future rate decisions will be made on a meeting-by-meeting basis and will be “data dependent”. This means is that the economy has to continue to perform well in order to justify a continued increase. Obviously, there is no guarantee.
Ultimately, it is this comment that circles back to the original question of at what pace will interest rates rise. It will likely come down to is continued GDP growth, declining unemployment, stable inflation, and a number of other economic variables. The simple truth is that we have been operating in uncharted territory for the past decade, and both the short term and long term implications have yet to be seen.
How does this affect you?
All of this commentary on interest rates might be conceptually interesting to think about, but what does it mean for you? Well, our variable interest rates are tied to the Prime rate, which is indirectly tied to the Federal Funds rate. As a result of the recent interest rate bump, we have raised our variable rates by 0.25%. As interest rates continue to rise, you can expect all student loan refinance lenders (not just Purefy!) to be raising their interest rates. Many others have already raised their rates to reflect the federal rate hike.
For those who have not refinanced yet, this decision from the Federal Reserve simply acts as a warning shot. Rates are still historically low, so there is plenty of time to refinance your high interest loans. However, the clock has officially started ticking.
Fixed vs. variable
Given the discussion above, you might naturally find yourself asking the question, should I refinance with a fixed or variable rate?
If you’re someone who is naturally risk adverse or likes the security of knowing what your interest rate will be, the answer is pretty easy. A fixed rate is for you. However, the rates for fixed rates are usually higher that variable rates. Call it paying a little extra for certainty.
If you’re someone who is a little more risk tolerant, or plan to pay down your student loans on an accelerated time table, you may still want to consider a variable rate loan. With a variable loan, you can take advantage of a lower rate over the short term.
Ultimately, this is only a question you can answer for yourself, as there are pros and cons to both the fixed and variable rates. However, one thing does remain certain, there is no better time to refinance your student loans with Purefy.
If you are interested in refinancing, the first step would be to Find Your Rate to see what you might be offered before starting an application. Should you choose to move forward, feel free to contact us. We’d be more than happy to walk you through the refinance process or further discuss the direction of interest rates with you.