Here’s what the stock market crash means for student loans.
Here’s what you need to know.
The stock market has been plummeting since the new year — and it could impact your student loans in a major way. On Monday, the Dow and S&P had dropped nearly 10% from their highs. For example, the Dow fell more than 1,100 points — before closing up for the day. Despite the intraday recovery, volatility is expected to continue and stocks may still fall as investors digest the impact of changing Fed policy and the prospect of higher interest rates. What does this mean for your student loans? Let’s find out.
1. The stock market is not directly connected to your student loans
The rise and fall of the stock market is not directly connected to your student loans. If you want a lower payment, the stock market won’t impact your monthly student loan payment. (Here are 7 ways to get a lower student loan payment). That said, if you’re invested in the stock market, a precipitous drop could affect the value of your investment portfolio. If you need extra cash to pay student loans, and need to sell your portfolio, a declining stock market may spell less disposable income to make student loan payments. Likewise, if you’re invested in Bitcoin or other crypto currencies, the same phenomena is true. For example, this past weekend, Bitcoin reached a price nearly 50% off its high, before recovering on Monday. That said, some student loan borrowers can’t afford to invest in the stock market. Advocates for wide-scale student loan cancellation argue that many student loan borrowers can’t afford to invest or save for retirement because their disposable income is used to pay student loans each month. (President Biden was asked about $10,000 of student loan cancellation. Here’s what he said).
2. Higher interest rates mean this for your student loans
While the stock market may not directly impact student loan borrowers, higher interest rates means this for your student loans. In 2022, the Federal Reserve indicated that it may raise interest rates up to three times (and possibility four times, according to Goldman Sachs) to combat inflation. If the Federal Reserve hikes interest rates, the cost of borrowing student loans increases. (How federal student loans will change this year). This helps savers earn more interest in their bank account, but it means student loan debt becomes more expensive to borrow. That said, federal student loans have fixed interest rates, which means no matter how much the Fed raises interest rates, you will always have the same interest rate for the life of your current student loans. (If you have federal student loans issued before July 1, 2006, then you may have a variable interest rate student loan. In this case, if interest rates increase, your variable interest rate will increase, and your student loans would become more expensive). Private student loan interest rates are set by private lenders, but if interest rates increase, you should expect variable interest rates on private student loans to rise as well. Importantly, if the Fed raises interest rates in the beginning of 2022, federal student loan borrowers who borrow a federal student loan after July 1, 2022 likely will pay a higher fixed interest rate. (What Republicans mean for student loans).
What the stock market crash means for student loan cancellation and student loan relief
Any impending stock market crash could affect prospects for student loan relief and student loan cancellation. Is student loan cancellation next? The Biden administration is monitoring the economy (and, to a lesser extent, the stock market) to assess the environment to restart federal student loan payments on May 1, 2022. Currently, federal student loan borrowers have been benefitting from nearly two years of federal student loan relief. Any major shock to the economy or the stock market, or both, could change perceptions about ending student loan relief and enacting student loan cancellation. (Here’s who won’t get student loan forgiveness). Progressives in Congress such as Senate Majority Leader Chuck Schumer (D-NY) and Sen. Elizabeth Warren (D-MA) likely would pressure Biden to extend student loan relief and enact wide-scale student loan cancellation if the economy soured or the stock market crashed further. When the stock market crashed in March 2020, Congress passed the Cares Act — the $2.2 trillion stimulus package — to provide record student loan relief that continues today. (Don’t expect Biden to enact wide-scale student loan cancellation before the end of student loan relief).
Student loans: next steps
It’s hard to predict what happens next in the stock market, but expect volatility. If stocks continue to drop — particularly if the Fed raises rates or the economy suffers further — student loans, student loan relief and student loan cancellation all may be impacted. For now, federal student loan relief is ending soon. So, make sure you’re prepared to restart student loan payments.
Here are some smart ways to pay off student loans and save money:
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