Nate Matherson - The Penny Hoarder

It finally happened.

For the first time since June 2006, the Federal Reserve raised interest rates.

In December, the Federal Open Market Committee (FOMC) approved a 0.25% interest rate hike, which would increase the federal funds to 0.25%-0.50%.

Set by the Federal Reserve, the federal funds rate is the interest rate large banks use to lend each other money overnight. Most FOMC members expect current federal funds rates to settle around 0.375% before the next rate hike.

So what does the federal funds rate increase mean for you? In short, a lot.

Interest rates are everywhere.

Do you have a credit card? Student loan? Mortgage? Savings account?

If so, think about how rising interest rates will influence your personal finances over the next few years.

Low interest rates have been a luxury for millions of indebted American consumers -- and they seem to have become the new norm. While you may not care about the interest rates banks use to lend each other money, you should know how the hike will impact your finances in the coming year.

Your Credit Card Debt Will Cost You More

American consumers currently hold a whopping $714 billion in credit card debt, according to the Federal Reserve’s Quarterly Report on Household Debt and Credit.

Credit cards almost always carry variable interest rates, which change with market interest rates. Nearly all credit card interest rates are calculated based off a widely accepted floating interest rate, which is tied to the the federal funds rate.

So, all credit card borrowers should keep their eyes on the federal funds rate. A rising interest rate means higher interest expenses for credit card borrowers.

For individuals with large amounts of credit card debt, even small interest rate changes can add up to hundreds or even thousands of dollars in additional interest expenses.

So Will Your Student Loans

If you have or are planning to get student loans, you should also take notice.

Each July, Congress sets federal student loan interest rates as a derivative of the 10-year Treasury note rate. Rising market interest rates will lead to increasing interest rates for new student loan borrowers.

That means if you’re planning to get a student loan next year, your interest rate will likely be higher than this year’s.

Any current federal student loans should be unaffected, since they’re issued with fixed interest rates.

However, if you have private student loans, you might not be as lucky. Many private student loan borrowers have variable rate loans.

The average college graduate will leave campus with about $29,000 in student loan debt this year, which means rising interest rates on new and current private loans could have a significant impact.

Virtually all types of consumer debt will be impacted by higher interest rates.

Mortgages, auto loans, credit cards, student loans and personal loans all will get a little more expensive this year.

But Rising Interest Rates Can Be Good, Too

On the flip side of the equation, rising interest rates may also benefit your personal finances.

If you’re a Penny Hoarder, rising interest rates might actually be a good thing.

Have you checked your savings account recently?

Over the last few years, savers have been put in a tough spot. The national average savings account interest rate is only 0.06%, according to the Federal Deposit Insurance Corporation (FDIC).

For the average consumer, rising interest rates will offer greater savings earnings. The same can be said for consumers with interest-bearing checking accounts and money market accounts.

So how should you prepare for rising interest rates?

You have time to create a personal finance plan -- interest rates aren’t going to increase that quickly. The economy is still in recovery mode.

The Federal Reserve is going to be extremely careful not to raise interest rates too often or quickly. Analysts are expecting a slow and steady pace for the next few years. But it’s never too early to create a plan.

Plan to Take Advantage of Higher Interest Rates

Start by paying off variable interest debts.

Additionally, consider refinancing variable rate mortgages, auto loans and student loans to fixed rates.

Fixed rates are at historic lows. If you lock yourself into a fixed rate, you won’t need to worry about your total loan cost or monthly payment increasing.

This won’t be a great year for savings accounts, but it should be better than 2015.

While interest rates might seem like a dry topic, they can have a huge effect on your finances, so make sure to take the time to consider how you can minimize any problems they’ll cause you, and take advantage of the chance to help your money grow.  

Your Turn: How will rising rates affect your personal finances?

Nate Matherson is the Co-Founder and CEO of LendEDU, a marketplace for student loans and student loan refinancing. You can email Nate directly at nate@lendedu.com.

Many students and families consider student loan debt to finance higher education. As a senior at the University of Delaware, I’ve seen billboards, banner ads, radio ads, television ads and even received a few direct mailers for different lenders.

Student loans are everywhere. But these ads don’t always paint the full picture for students and families. Student loans have a secret, and that secret is interest.

I talk with students every day who are unaware their student loan debt is currently accruing interest. The truth is, many private and federal student loans accumulate and capitalize interest while students are in school or during periods of deferment.

Unfortunately, not every student reads his or her promissory note in the age of online loan applications. I’d like to share a few tips to help you avoid compounding student loan interest, and hopefully put you on a path to beat your student loan debt.

What’s Compound Interest? What’s Capitalization?

I hate to start an article off with boring financial definitions. That being said, bear with me.

As a finance major, I’m pretty familiar with the concept of compound interest. At its simplest, when you borrow money you are charged interest.

Interest is a fee charged for lending you money. When you borrow money, you pay interest for access to the loan. Interest can be charged daily, weekly, monthly and even yearly.

When it comes to student loans, my interest is charged daily. If you fail to pay your interest as it accumulates, the interest you owe will be added to the principal of your loan. This is known as capitalized interest.

Simply stated, interest will be charged on both the loan principal and accumulated interest. The end result: Capitalized interest equates to a much higher total loan and education cost.

Federal and Private Student Loans

If you have student loans, odds are you have them through the federal government.

However, the rising costs of higher education have forced more and more students to use private student loans to fund their degrees.

The commercials I referenced earlier are from private student loan lenders. In contrast, federal student loans such as Stafford, Perkins and PLUS loans are offered by the Department of Education, which does not advertise directly.

Both federal and private student loans may accrue interest while you are in school.

  • Unsubsidized loans do accrue interest
  • Subsidized loans do not accrue interest (the DOE pays the accrued interest)

Federal unsubsidized loans are offered to every student who enters college and accrue interest while you are in school. Private student loans always accrue interest while you are in school. Before signing the promissory note, determine your types of loans and interest.

Private student loans typically have higher interest rates than federal student loans. Meaning, private student loans will accrue interest faster than federal student loans.

For example, federal unsubsidized Stafford loans have a 4.29% interest rate. Private student loan rates range from 2% all the way up to 12% or more. Most private student loan borrowers fall somewhere in the middle of this range.

The Benefits of Paying Student Loan Interest in School

Paying accrued interest in school will save you money. A lot of it.

For example, the average student loan borrower had about $30,000 in debt upon graduation this year. Say that graduate didn’t pay any of his student loan interest during his four-year education. This unpaid interest accrued and was added to the principal of the loan.

Assuming a 6.5% average interest rate and monthly capitalization, this graduate will expect to pay about $4,300 extra during the life of his loan. This is in addition to regular principal and interest payments.

And the more debt you have, the greater the cost of capitalized interest. So, how do you pay accrued interest in school?

Great question. In fact, most private student loan lenders offer an interest-only payment option for students in college. You can choose to be billed for your accrued interest each month (approximately $100-150). Some lenders even offer special discounts for students willing to pay their interest in school.

I was able to lower my interest rate by 0.50% because I chose to make interest-only payments. Even small savings can add up to thousands of dollars over the life of the loan.

When it comes to federal student loans, it’s a little trickier. Depending on your loan servicer, you will need to make interest payments in different ways. Today, most federal student loan servicers will allow you to schedule recurring electronic payments. Simply calculate your monthly accrued interest, and set up a recurring payment for this amount.

Not only does paying interest in school get you a lower interest rate, it will also save the average student thousands of dollars over the life of the loan. That money could be put toward a car payment, mortgage or even spring break in Cancun!

Creative Ways to Earn Money to Pay Student Loan Interest

Making interest payments in college isn’t easy, nor fun. On the 14th of every month, I watch my bank account get a little lighter.

But I know I’m helping my future self, and I’ve managed to pay my interest each month since the spring semester of freshman year.

I know, I know: You’re a broke college student. Who isn’t? Here are a few ways I’ve managed to pay my student loan interest.

On-Campus Jobs

I worked at the finance computer center my freshman year of college. Many on-campus jobs can pay $9 an hour or more for work that feels like study hall.

Moreover, managers are usually students, too, and understanding your need to schedule work around your classes and other commitments.

Scholarships

Don’t stop applying for scholarships once you’ve entered school. Too many students believe scholarships are simply for incoming freshman and new students, which is a myth.

Scholarships exist for everything under the sun. Look for ones related to your degree, your passions and yourself. Here’s a list of 100 scholarships to get you started -- plus another list of 100 more unusual options.

Are you a finance student? An LGBT student? A graduate student? Look for scholarships that fit your mold. I’ve earned them, and you can, too!

Freelancing or Online Jobs

I’ve always loved investing and finance, and I found three different financial media companies willing to pay me to write about my passion. Over the course of my college career, I’ve probably written well over 200 financial articles for freelance writing jobs.

The pay is good too: I’ve made about $75 per article. Here are a few lists of sites that pay you to write for them.

Writing not your talent? Try one of these other online jobs for college students.

Final Thoughts

Simply put, paying your student loan interest in college sucks.

But at the end of the day, you can save yourself thousands of dollars if you bite the bullet and pay your accrued interest each month.

Your Turn: Would you consider making interest-only payments on your student loans? What are some other creative ways you’ve paid down debt as a student?

Nate Matherson is a student loan borrower. He is also the Co-Founder and CEO of LendEDU, a marketplace for student loans and student loan refinancing. LendEDU helps borrowers find the best student loan quotes in one place. LendEDU works to create transparency in the student loan market.

College students are full of ideas. When you combine young minds, technology and cheap beer, you are bound to come up with a few ideas for the next great app or product.

When I started my first company in January of 2014, my partner Matt and I were sophomores at the University of Delaware. Together we pooled $1,600 in startup capital, formed our first LLC and launched our business.

Since then, our company has changed directions, we’ve attended a startup accelerator and we’ve even raised outside investor capital.

If you’re a college student with entrepreneurial ambitions, why wait? Here’s how to launch a startup from your dorm room.

Validate Your Ideas First

Like I mentioned above, college students are full of elevator pitches. To turn that idea into a business, the first step you need to take is validating your idea.

In short, you need to make sure your idea is valuable to your end customer or user -- that your product or service is something people actually want.

Finding out if you have a good idea at the start will save you from a lot of headaches later on; imagine investing a ton of time and effort into a product no one wants! The value you’ll deliver is called your value proposition.

To confirm you have a good idea, you need to first create a hypothesis. For example, “People will buy healthy dog treats because they care about their dog’s health” or “People will pay more for healthy dog treats because pet health is an important issue.”

Why would someone want your product or service?

To test your hypothesis, do some customer discovery, a process of testing your hypotheses with real potential customers.

Find 100 people who would be in the market for your product and interview them for 10 to 15 minutes each. Ask them a series of questions to validate, or invalidate, your hypothesis.

Finding these people isn’t usually too difficult. In our case, we needed to talk with student loan borrowers. We went to a local college campus and asked students walking between classes if we could talk to them for a few minutes. Surprisingly, most people were willing to help once we explained what we were doing.

Don’t interview your family or close friends. You want unbiased feedback during customer discovery, and people close to you might be too excited about helping you to be objective.

We used a tool called Lean Launch Lab to track our interviews and test our hypotheses.

Be as Frugal as Possible

I’ve always considered myself a frugal person. When we started our first company, my partner and I were able to find $1,600 in capital to get our idea off the ground, using personal savings from our part-time jobs. After spending $100 to register our LLC, we had $1,500 left in our account.

Too often, I hear great ideas left undeveloped by students who think they don’t have enough capital to start a business. I can’t stand the “I don’t have enough money” or “it will cost too much” excuses.

Today, it is cheaper to start a company than ever before. The rapid advancement in ready-made online resources has made starting a business inexpensive; you can launch just about any tech-based business for less than $1,000.

Looking to start an e-commerce website for healthy dog treats? For about $100 you can buy a domain name and two years’ worth of hosting and set up a beautiful e-commerce store on WordPress.

Starting a company doesn’t have to be expensive. If you cut out the fat, I bet “it will cost too much” will no longer be an excuse. Do you need a live customer support on day one? Probably not, a simple contact form should do.

Being a frugal entrepreneur will help you focus on the key components needed to deliver your value proposition.

If you know where to look, you can also find a lot of free money to help you get your startup off the ground.

At the University of Delaware, we have a pretty well developed entrepreneurial program. My partner and I have never taken an entrepreneurial class in our life, but we knew that our college had an entrepreneurial program to provide funding to student-run startups.

After building our initial product, we received more than $5,000 of free money, as well as a host of other benefits such as a free office, utilities, coffee and Internet.

Starting a business in college doesn’t need to be expensive. Be frugal with your own resources and look to leverage your college’s resources. Don’t let “I don’t have enough money” be an excuse.

Apply to an Accelerator

The concept of a startup accelerator was pioneered by the now infamous Y Combinator. Accelerators invest a small amount of capital in a group of early-stage businesses. They help you quickly develop your product, do customer discovery, teach you entrepreneurial principles, and help you connect with influential people in your industry.

Startup accelerators can be great if you’ve already established a simple version of your product or business and are looking to take your company to the next level.

In most cases, startup accelerators are run by successful entrepreneurs looking to help new entrepreneurs. Giving back is a big idea in the entrepreneurial world.

Accelerators often provide about $20,000 for 6% of your company. Overnight you can turn your crazy idea into a business worth $333,333 on paper. Accelerators are usually funded by groups of private investors who want you to succeed, since they’ll earn returns on their investments.

We participated in the four-month-long Iowa Startup Accelerator in Cedar Rapids, Iowa. Applying while in college was a great idea. Accelerators love college students, and I learned more during the program than I ever did in school!

Market Yourself and Your Business

As your business progresses, you will likely look for ways to grow faster. Most entrepreneurs start by looking for additional capital to help accelerate growth.

Whether you want to work with an accelerator or an angel investor, you are your most important selling point. Accelerators and angel investors invest in the people in a business, more than the product. They want to see passion, founder chemistry and a solid resume.

A potential investor needs to know you won’t give up when the going gets tough. Having passion for your product and great partners will keep you going even through the worst days as an entrepreneur.

Start courting investors by building relationships through weekly newsletters, coffee dates and phone calls. You’re not going to get a check on the first meeting. Odds are, it will take months before a potential investor turns into an actual investor.

Start finding potential investors by looking for startup events such as 1MillionCups, local startup competitions or Meetup groups.

Launching a startup in college is an incredibly rewarding experience. You will learn a lot about your industry and yourself. Test your ideas, market yourself and your product, and use all the resources at your disposal… and you might end up with a profitable company.

Your Turn: Have you launched a startup as a college student? We’d love to hear about it!

Nate Matherson is the Co-Founder and CEO of LendEDU, a marketplace for student loans and student loan refinancing. Nate started LendEDU while he was a student at the University of Delaware. You can email Nate directly at nate@lendedu.com!