Low interest rates are a fact of life for young people. The last time the Federal Reserve raised rates in a systematic way was 2006, when kids now entering high school were only recently out of diapers.
Some 83 million Millennials in the U.S., and others around the world, have barely known periods of rising interest rates. In the U.S., there have been only two such periods since before the Internet bubble.
But we have entered another such period. The Federal Reserve has raised rates three times this year alone and will probably keep at it well into next year. If you haven’t already spoken to your students or kids about the implications of a rising rate environment, now is a teachable moment.
The cumulative impact is starting to matter. Real estate prices are showing some signs of weakening as mortgages get more expensive. So far, the economy continues to hum but rising rates almost always signal a slowdown ahead.
Rising interest rates change a lot about how individuals should manage their money. Bank deposit accounts and other short-term places for cash become a little more attractive for savers. That’s welcome news for the risk averse. Retirees will eke out a little more income without taking more risk. Younger people with near-term goals like a down payment for a car or a house can feel better about keeping that money out of the stock market. It also creates a better backdrop for stashing money in an emergency fund.
But loan costs will go up—not so dramatically on credit cards, which already may charge 15% or more—but on personal and auto loans, along with mortgages. More to the point for Millennials: student debt rates will nudge higher.
Anyone with a student loan or considering one needs to take another look at the terms. This is something teachers can explain in school, financial advisers can demonstrate in their practice, and human resources counselors can encourage at work.
In a nutshell, federal student loans since 2006 probably carry a fixed rate and will not budge as the Fed raises rates. But federal student loans taken before 2006 may have a variable rate, meaning it will float higher as the Fed boosts its benchmark rate. That is also true of many refinanced student loans and most private student loans. Your monthly nut is going up, even if only slowly.
While rates were low, these were small considerations. Not anymore. It may make sense to…
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…refinance into a fixed rate now. Rising rates also make it important to get off the fence if you are considering financing a big purchase. Why wait for the cost of money to go higher?
Higher rates are not a bad thing. They signal a stronger economy with jobs, wage growth and opportunity. That’s an important point to make. Higher rates also tend to forestall inflation, another key point to make. And let’s understand that rates remain historically low. So panic would be the wrong response.
The message for young people: This is how the broad economy works. It’s not good or bad. It just is. It falls on the individual to adjust—and that is the whole point of financial education. Don’t miss this moment to make that clear.