Last week, the Federal Reserve preached more patience with interest rate policy, possibly signaling lesser rate hikes than anticipated. However, combined with a recent data showing a strong labor market, more rate hikes could also be expected and as such, university students taking on private loan debt should be wary of their options.
“It’s always a little tough to tell exactly where rates are going to go in the near future,” said Clifford A. Robb, associate professor of consumer science at the University of Wisconsin-Madison. “I do think 2019 will see a little bit more rate increases.”
The last three months of volatility in the stock market may have signaled to the Fed that more caution is necessary with respect to setting monetary policy. However, markets soared last week as job growth surged to 312,000 during the month of December, handily beating economists’ expectations of 176,000 nonfarm payrolls added.
With data still showing signs of a strong labor market, the Fed could still continue its rate-hiking policy that saw four rate increases during 2018. More rate increases will particularly affect private student loan debt where the rates are typically adjustable and tied to an economic index.
Related: Look to Short-Duration Bond ETFs to Hedge Rate Risks
With the fluctuations in rate, students should read the fine print more carefully before deciding to take on these types of loans if government debt alone won’t suffice in paying for education.
“It’s going to vary based on your creditworthiness,” said Robb. “I definitely encourage consumers who are considering the need for additional borrowing to be very discerning and very thoughtful about that process, because there is a lot of information and it can be very overwhelming.”
However, the amount of student loan debt, federal and private, has been waning since 2010.
Still, Robb cautions students to make sure that taking on private student loan debt fits into their long-term goals. Students who proceed with the debt and then change course with their education or career objectives could get stuck with the debt as interest begins to accumulate.
“I would generally argue that there’s reasonable conditions under which borrowing makes a lot of sense, and student loans often times fit that narrative with the idea this is an investment in long-term projected future income,” Robb said. “But we have to account for the fact that many people get into education programs and, for circumstances — sometimes beyond control or different factors — may not complete those programs. And if you leave with debt and without a degree, that can be a really big problem.”
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