Inflation Can Make Repaying Student Loans Even Harder—Here’s What You Need to Know

High inflation can both directly and indirectly make student loan repayments less affordable. As prices rise, borrowers may struggle to find sufficient room in their budgets for their monthly debt payments, especially if they have variable-rate loans that charge more amidst higher inflation. However, even fixed-rate student loans can be difficult to pay back during inflationary periods, due to the aforementioned budget constraints.

Understanding Inflation and Its Economic Impact

Inflation involves broad price increases along with decreases in purchasing power, meaning your money doesn’t go as far as it used to.

Inflation can be a difficult cycle to stop since as prices rise, companies usually have to pay more for materials and labor, which then typically causes them to increase their own prices as well. The solution often involves slowing down the economy via higher interest rates, so weakening demand causes companies to stop raising prices so quickly.

How Inflation Affects Student Loan Repayment

High inflation can make student loans harder to repay due to several factors.

• Interest rates: While existing fixed-rate loans—like all federal education loans since July 1, 2006—aren’t directly affected by inflation, some private student loans are variable, meaning that they could charge more in interest during periods of high inflation. Additionally, as federal student loan interest rates can be changed ahead of each academic year, new fixed-rate loans can also cost more due to inflation.
• Repayment thresholds: Some borrowers are on income-driven repayment (IDR) plans, which base monthly payments on your income in order to make them more affordable. However, if your employer gives you a raise to keep pace with inflation, you could end up paying more.
• Decreased disposable income: Higher costs in areas such as housing, food, and transportation can make it harder to afford student loan payments. A 2024 study found that students felt concerned and frustrated about inflation, and rising costs for necessities, including textbooks and internet access, hurt their studies.
• Potential for more debt: If you’re currently in school, rising costs may require taking out even more student debt to fund your education. Alternatively, if you’ve graduated but are struggling to make your budget work due to inflation, you might end up getting a new loan to cover your current payments and avoid defaulting on your old debt.

While there are many potentially detrimental effects of inflation, some borrowers may actually end up benefiting from it. The flip side of higher interest rates is that they can also increase the earning potential of vehicles such as savings accounts and certificates of deposit (CDs). Of course, the degree to which this can help you afford your student debt payments will vary based on how inflation affects your other expenses.

Strategies for Borrowers to Manage Inflation’s Impact

One option to counter inflation is careful budgeting to determine where you can free up funds for student loan payments. That could also mean looking at the income side of the equation and searching for a higher-paying job, pushing for a promotion and raise, or starting a side hustle.

Another option is debt consolidation. With federal student loans, a direct consolidation loan allows you to streamline your monthly payments and potentially secure a lower interest rate—depending on the rates of your current loans.

Refinancing your student loans could also help, though with federal loans, you can only refinance with a private lender. In some cases, refinancing can help you get a lower rate, but federal loans often already have better rates than their private counterparts. Additionally, refinancing federal and private student loans together may mean losing out on the benefits and protections that the former offers, including deferment and forbearance options as well as loan forgiveness programs.

The Bottom Line

Inflation can make repaying student loans more difficult, particularly by squeezing your budget and increasing interest rates for variable-rate loans. However, by cutting back on other expenses and finding opportunities to increase your income, the relative cost of your student loan balance can actually shrink.