Should Millennials Worry That The Federal Reserve Is About To Raise Interest Rates? What To Know

Higher interest rates are coming, but the kids are alright.

The Federal Reserve is widely expected to announce a quarter-percentage-point increase in the target range of its policy interest rate Wednesday, providing the U.S. economy with a fatter cushion in case economic conditions take a turn for the worse. But while markets often jolt in response to newly tighter monetary policy from the Fed, younger Americans, for the most part, are relatively insulated from the adverse effects of a hike, at least this time around.

A decision by the Federal Open Market Committee (FOMC), the central bank’s monetary policy-making body, to increase the rate to a band of between 1 percent and 1.25 percent would mark its fourth increase since the Great Recession, after which the Fed dropped the rate to nearly zero as a means of stimulating increased borrowing and economic activity. At the close of the previous meeting of the FOMC in early May, Fed Chairman Janet Yellen said the central bank would be keeping its range at between 0.75 percent and 1 percent, citing an inflation rate below the ideal 2 percent, a decline in consumer prices in March and “slowing” growth in the first quarter of 2017.

By boosting the rate again, the Fed will likely make — and already has made — holding debt more expensive. Not everyone will feel it, however.

Read: Delinquency On College Debt Soars Above That Of Credit Cards, Mortgages

The rate of delinquency on student debt, which crept up to nearly $1.44 trillion in the first quarter, has stood well above those of all other types of debt over the past five years, and the rate of serious delinquency even more so, according to a recent report from the Fed Bank of New York.

For those defaulting on their college loans — a cohort that includes a disproportionate number of students at for-profit colleges, who tend to skew female, non-white and low-income — an interest rate increase would be “just another log on that fire,” said Greg McBride, chief financial analyst at the consumer finance site Bankrate. But, he cautioned, the consequences apply only to a specific subset of student borrowers.

“The people it’s going to impact are people with variable-rate, private loans,” McBride said. A student with that kind of loan will face a rate “one full percentage point higher this summer than it was two summers ago” — before the Fed’s initial post-recession rate increase in December 2015, he said.

But private student loans, while making up a massive $102 billion of the college debt total, represented only 7.5 percent of that total as of the third quarter of 2016, and exhibited lower rates of delinquency, according to the higher education data company MeasureOne. And that's including those with fixed private rates as well as those with variable rates. Private student loan interest rates generally follow the London Interbank Offered Rate, or LIBOR, which hews closely to the bank-to-bank lending rate the Fed will likely raise on Wednesday. By contrast, rates on federal loans, which make up the lion’s share, are set by Congress and based on auctions of 10-year Treasury notes, which also move in conjunction with the Fed policy rate, but only apply to new debt taken on after the rate is determined.

“It’s a small slice, it’s not a huge number of borrowers,” said Brianna McGurran, a student loan expert at the personal finance site NerdWallet, of the private, variable-rate student loans. She added that the increase in monthly payments could amount to just “a couple of dollars.”

Interest rates on federal loans, she noted, would be going up in July for the first time since 2014, to 4.45 percent from this year’s 3.76 percent, but their protections for borrowers still made them a better option.

Read: Who Pays For Millennials’ College Degrees? Not Their Parents, Especially If They’re Women

Student loans aside, many millennials stand to avoid a negative consequence of the impending Fed rate hike simply by not having much credit card debt. Holders of such debt could see movement in interest rates similar to those with variable-rate, private student loans, according to McBride. But the portion of Americans younger than 35 with outstanding credit card debt hit its lowest level in nearly three decades last year, and only a third of Americans between the ages of 18 and 29 have credit cards — compared to 55 percent for those ages 30 to 49, 62 percent for those ages 50 to 64 and 68 percent for those age 65 and up.

McGurran attributed this disparity to the relative lack of access to credit resulting from the 2009 Credit CARD Act, which limited the ability of credit card issuers to market their cards on college campuses, but many theorize that millennials harbor a sort of debt-anxiety associated with coming of age during a credit collapse.

Lastly, in the wake of previous Fed interest rate hikes, worries abounded that mortgage rates — which, like interest rates on credit card debt, tend to follow the Fed’s policy rate target — would keep escalating, scaring potential new homebuyers from entering the housing market. But that’s no longer the case, as the 30-year fixed mortgage rate has steadily drooped over the past several months after shooting up toward the end of 2016. The reason for the switch in direction, according to Tim Manni, NerdWallet’s mortgage expert, is the lack of surprise and shock with each new rise in the Fed policy rate.

“That takes a little bit of the sting out of the rate change,” Manni said, especially when investors and people considering entering the housing market are “plugged in.”

Either way, the previous housing market panic over Fed rate increases of just 0.25 percent may have been overblown, or at least misplaced, he added.

“That’s not really making a big change to a monthly payment,” Manni said. “If rates shift by a couple of basis points [or hundreths of a percentage point], and you’re thinking of not entering the market because of that, you’re not really ready to enter the market.”