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Federal Reserve raises interest rates, could affect student loans

April 2, 1997

By Elizabeth Case

Lariat Reporter

Last week the Federal Reserve raised interest rates by 25 basis points, or a quarter of a percentage point. While this sounds like a negligible amount, students may see the increase on their credit card bill or when they finance their first car.

'Credit cards with variable interest rates and the interest rate on bank loans might also increase by a quarter of a percentage point,' Dr. Tom Kelly, an economics professor, said.

The Federal Reserve decided to raise interest rates in anticipation of a tight labor market, Kelly said. It is better to raise the rate before inflation strikes, he said. The tight labor market can be attributed to worker insecurity, Kelly said, and as the demand for labor increases, wage rates will increase, in turn increasing production costs. The increased price that will result due to these increases is inflation.

Isaiah Nelson at the Guaranty Federal Bank Loan Office in Dallas said in a telephone interview Tuesday that no matter how insignificant the amount, the word 'increase' scares consumers.

Interest rates on loans will increase, Nelson said, and the influx of loans will decrease in the short run, but will eventually level off.

'Each financial institution will decide for themselves how to adjust their interest rates, using the market as a whole for their guide,' said Nelson. 'Since the Federal Reserve announced their increase, we have had more calls regarding its effect on loans. It is too early to tell if the amount of loans have decreased.'

The financial aid office said that the Stafford loan rates are set July 1.

'We won't know the effect of the increase until July,' said Jerry Bayer, financial aid counselor.

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