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posted to Financial Advisors on 12/25/08 11:28 AM, Armonk, NY 10504

I have a $60,000 private student loan which has a variable interest rate. The rate is pegged to the LIBOR.
This loan makes me nervous because what will happen to my monthly payments as interest rates rise. Could I be wiped out if they get really high like they were in the 80's?
Is there a way to convert this variable rate loan into a fixed rate loan?
I called around and it seems that there are only variable rate loans being offered by so called consolidators.
Is there a financial instrument I could purchase which would hedge my risk?
What are my options?

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Specialist Answer 1 of 1

Answered By

Lanzana Advisors, 12/26/08 09:20 AM

Lanzana Advisors
Po Box 222
Pleasantville, NY 10570
914-206-5115
info@lanzana.com

View Business Info

There are ways to hedge variable interest rate risk, however, I am not that knowledgeable about those products and I suspect the cost of the hedge will be prohibitive considering the size of your loan.

If you have good credit and are very financially disciplined your credit cards may offer some interesting options for refinancing some of this loan amount if you are unable to find an appealing fixed rate option. The good news is rates are low right now, LIBOR typically trends with US rates and only recently deviated for a brief time. See chart;

http://www.wsjprimerate.us/usprimerate-vs-libor-vs-fedfundstargetrate-chart.htm

Your loan should have lifetime caps, the terms of which will be detailed in the original loan note that you signed. You can calculate you maximum payment based on that ceiling rate to determine you maximum exposure.

Most student loans offer 20 year amortizations; $60,000 at 6% and 18% respectively will result in payments of $430 and $926. My advice is take advantage of low rates now by making aggressive payments and being sure your credit rating is strong; this way when the banks start lending again, you will have more options to refinance some or the entire loan.

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