The Federal Reserve cut interest rates by 50 basis points (bps) as of September 18, 2024, its first major rate cut in four years. But what does this mean, and how does it impact university students?
The Federal Funds Rate is controlled by the United States’ central bank, the Federal Reserve, through monetary policy. The rate is raised or lowered depending on our current economic conditions as the Fed tries to achieve its two main jobs assigned by Congress: keep inflation under control and promote maximum employment. A cut in interest rates stimulates economic activity by making borrowing costs for businesses and individuals cheaper. For example, when taking out a loan, lower interest rates mean smaller monthly payments. This frees up more money in their budget to spend on other things, like dining out or entertainment, stimulating economic growth. For students, the impacts will be noticeable in two main areas: the job market and student loans.
The Fed rate cut has significant positives for students. Although the effects may not immediately be observable, they will gradually become more noticeable as the economy adjusts and adapts to the new environment. According to Glassdoor’s economic expert Daniel Zhao, “changes in monetary policy take about 18 months to fully be reflected” [1]. Over the next few years, economic stimulation will result in more job openings and provide greater opportunities as businesses expand operations and hire more workers. This is good news for current students and recent graduates searching to land an internship or full-time employment. Will this impact all industries and sectors? Not necessarily.
As borrowing and investment costs decrease, companies are more likely to retain existing staff and potentially create new positions. While specific growth-intensive industries that rely on borrowing for expansion will ramp up hiring, the tech industry remains somewhat of an anomaly. Many tech firms overhired in 2021 following the pandemic, so they are not expected to significantly increase hiring given their surplus of workers, but there will still be some growth [3]. In contrast, industries such as construction, real estate investment and development, and especially finance are likely to boost their hiring. This presents a promising outlook for students considering careers in these fields as businesses seek fresh talent to expand and capitalize on favorable economic conditions. The U.S. saw substantial growth following September’s job report, with 254,000 jobs added [4]. Additionally, rate cuts could enhance stability and job security in the labor market by reducing the risk of layoffs.
Regarding student loans, the rate cut will not affect federal student loan rates until July 1, 2025. But, there is good news for students with private student loans. It will be easier to find more competitive rates as private lenders adjust their rates in response to Federal Reserve policy changes. This means students with variable-rate loans or those looking to refinance existing loans may see lower interest rates, reducing their monthly payments and the overall cost of borrowing. Students with a fixed-rate private loan will not see changes in their current rates, but it is possible to refinance the loan with a different lender or loan. Students with variable-rate private student loans will feel the effects of the rate cut the most. Monthly interest charges will change depending on market conditions, and the high rate cut will result in more favorable student payments.
The Fed’s decisions may not have a direct impact on your student loans. However, if you have a variable-rate student loan or plan to take out a new one, it’s important to keep an eye on changes to the federal funds rate. Adjusting your timing based on rate fluctuations could potentially help you save money on interest in the long run.
Ultimately, the Federal Reserve's rate cut is a positive development for students, offering potential job growth in key industries and lower borrowing costs for private loans. As businesses expand and the economy stabilizes, students can look forward to increased employment opportunities and improved financial flexibility.
For further information, check out this video: https://www.nytimes.com/video/business/economy/100000009704500/federal-reserve-interest-rates-cut.html?smid=url-share
All content is the intellectual property of the Virginia Undergraduate Business Review.
REFERENCES
[1] Zhao, Daniel. 2024. “Glassdoor Employee Confidence Index: Flatlining to Start the Fall - Glassdoor US.” Glassdoor.com. October 8, 2024. https://www.glassdoor.com/blog/glassdoor-employee-confidence-index-september-2024/.
[CHART] Kleven, Joe. 2024. “What Happens after a Fed Rate Cut?” YCharts. September 25, 2024. https://get.ycharts.com/resources/blog/what-happens-after-a-fed-rate-hike/.
[3] Ling, Hannah Erin. 2024. “These Industries Are Most Likely to Hire Faster Now That the Fed Cut Interest Rates. Hint: Tech Isn’t on the List.” Market Watch. September 23, 2024. https://www.marketwatch.com/story/the-feds-rate-cut-should-make-it-easier-to-get-a-job-eventually-here-are-the-industries-that-could-ramp-up-hiring-first-4d7fbdb3.
[4] Sor, Jennifer. 2024. “Job Market Outlook: Unemployment to Accelerate, Usher Steeper Rate Cuts.” Business Insider. Insider. September 27, 2024. https://www.businessinsider.com/job-market-unemployment-rate-interest-rates-fed-cuts-outlook-economy-2024-9.
[IMAGE] Illustration: Sarah Grillo/Axios https://www.axios.com/2023/12/04/case-for-early-rate-cuts.
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