What Every Borrower Should Know About Student Loan Interest Rates | Student loans and advice

If you are a student and take out a loan for your studies, you know that every penny counts. You want to borrow what you need, and not a dollar more, for less interest.

After all, the interest rate on your student loan could have a substantial impact on your total cost of borrowing and your monthly payment. Even a 2% interest rate difference on $30,000 debt, which is lower than the average student loan debt for 2016 graduates, could save (or cost) you over $3,500. $ over the term of the loan.

Although you can’t choose your interest rate, understanding how interest rates are set on federal and private student loans, types of interest rates, and other borrowing costs can help you make an informed decision regarding the financing of your studies.

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Interest Rates on Federal and Private Student Loans

Federal student loans offer the same interest rate to all eligible borrowers, regardless of income or credit. Most federal student loans don’t even require a credit check. The only exception: Direct PLUS loans for graduate students or parents of undergraduate students require a credit check to determine your eligibility, but your credit still does not affect your interest rate.

Federal student loans always have a fixed rate, which means it won’t change once the loan is disbursed. For loans disbursed as of July 1, 2017, the rates are:

Federal Student Loan Type Borrowers Interest rate (for loans disbursed from July 1, 2017 to June 30, 2018)
Subsidized direct loans Undergraduate students 4.45 percent
Direct unsubsidized loans Undergraduate students 4.45 percent
Direct unsubsidized loans Graduate students or professionals 6 percent
Direct Loans PLUS Parents of students and graduate or professional students 7 percent
Perkins Loans Undergraduate, graduate and professional students with exceptional financial need 5% (regardless of disbursement date)

Source: US Department of Education

You can also find interest rates for federal student loans made before July 1, 2017 online. For example, interest rates for subsidized direct undergraduate loans have ranged from 3.4% to 6.8% since July 2006. And in general, you will see that interest rates have increased over the past two years, but are still lower than they were from July 2006 to June 2010.

Private student lenders may offer different interest rate ranges, and the interest rate may vary.

“Private student loans work more like auto loans or personal loans, compared to federal student loans,” Robert Farrington, founder of personal finance website The College Investor, says in an email. “The main factors that affect your private student loan rate will be your credit score, income, and loan factors. [such as amount and loan term]. Of course, the higher your income, the better your credit rating, and the shorter your loan term, the better your interest rate will be. »

For example, since January 15, Connext, which U.S. News has named one of the top private student lenders for its competitive interest rates, has been offering a $12,000 fixed-rate loan for undergraduate students in 10 years with an APR of 5.4 to 9.7%. The same loan amount can have an APR of 6.89 to 10.76% for a term of 15 years. For a variable rate loan, the initial APR range is 3.35-10.31% for a 10-year loan or 5.56-10.89% for a 15-year loan.

However, the lowest advertised interest rate is not necessarily the rate you will receive. You may need a creditworthy co-signer to qualify for a private student loan, and the lowest rate may only be available to the most creditworthy applicants in some areas.

The US Department of Education says federal student loans often offer borrowers a lower interest rate than private student loans. And a 2017 report from LendEdu, an online student loan marketplace, found the overall average interest rate on private student loans was 7.99%, compared to 4.45-7% for federal student loans. .

Federal student loans also offer other benefits. Adam S. Minsky, an attorney who specializes in helping student borrowers, says via email, “Federal loans have much more flexibility than private loans, including generous deferral and forbearance options, income-based loan repayment and cancellation options than private loans generally Federal loans also have stronger protections for consumers, including a death and disability release, and the right to remedy the fault.

Who sets student loan interest rates?

Federal student loans have flat rates because Congress sets the interest rate on federal student loans. Rates are based on the interest rate of a 10-year Treasury note (determined at an auction in May) plus a premium rate, which depends on the type of loan and whether it is an undergraduate or graduate student. The resulting federal student loan interest rates apply to federal loans that are disbursed from July 1 through June 30 of the following year.

Interest rates on private student loans can vary because there are no uniform regulations dictating how lenders set their rates for individual borrowers. Even if you find two lenders that have the same advertised interest rate ranges, the rates you receive may be different because the lenders use proprietary underwriting processes. It’s important to compare the rates that private student lenders offer you, and not just the ranges they advertise, before taking out a private student loan.

Additional costs to consider

Although the interest rate on your loan may be one of the most important factors in your overall cost of borrowing, it is not the only one to consider. Other fees can affect your APR, which is your actual cost of borrowing each year. The APR for a student loan takes into account the loan’s interest rate, fees, when you start making full payments, and when interest is compounded.

Lenders may charge an origination fee equal to a portion of your loan amount. It is often taken from money sent to you or your school. The loan fee is 1.066% for subsidized direct loans and unsubsidized direct loans disbursed from October 1, 2017 to September 30, 2018. It is 4.264% for Direct PLUS loans disbursed during this period. Federal Perkins loans have no fees, and private student lenders often do not charge origination fees.

Compounding occurs when accrued interest on your loan becomes part of your loan principal. Your interest rate only applies to the principal of your loan, so if your principal increases, your interest charges may also increase.

With federal student loans, interest is capitalized at the end of your grace period, when your loan leaves a forbearance or deferment period, or if you consolidate or refinance your loans.

If you have subsidized federal student loans, the Department of Education pays your interest while you are in school at least half-time, during the grace period, and during adjournment. You can ask your counselor what is considered part-time at your school.

If you have unsubsidized federal loans, a subsidized forbearance loan, or a private student loan, interest may accrue when you don’t make full payments and then accrue once you start making full payments. interest and capital.

One way to avoid interest capitalization is to make interest payments while you are in school or during periods of adjournment or abstention. Federal and private student loans have no prepayment penalty, so there are no fees for making additional payments.

Interest rate reductions

There are several situations in which the interest rate on your student loan could change.

For one thing, you may be able to get a temporary interest rate reduction if you sign up for autopay and let the lender automatically deduct your monthly payment from your bank account. Federal direct loans offer an interest rate reduction of 0.25%, and many private lenders offer an interest rate reduction of 0.25 to 0.5% with automatic payment. Some private lenders also offer a permanent interest rate reduction of 0.25 to 0.5 if you have a financial account with them when you take out a new student loan.

Variable rate loans

Private lenders may also offer variable rate student loans, where the interest rate combines an indexed rate and a margin rate. The margin rate may depend on the lender and your creditworthiness, and it will not change after you take out the loan. However, the index rate may change over time.

For example, the index rate could be the three-month London Interbank Offered Rate, or Libor, which is the interest rate a bank can pay to borrow money from another bank for three months. . The variable rate of your student loan can increase or decrease depending on the evolution of the three-month Libor.

Student loan refinancing

You may be able to lower your interest rate by refinancing your federal or private student loans. You can do this by applying for and taking out a new private student loan, and your new lender will pay off any existing student loans you want to refinance.

The interest rate on your new loan may depend on the lender and your creditworthiness. You may want to establish a positive credit history, a good credit rating, and have a well-paying job before you consider refinancing. You may need to get a degree to qualify. Similar to applying for a private student loan while attending school, you can compare student loan refinance companies to find the lender that offers you the best interest rate and benefits.

If you qualify for a lower interest rate than you currently have, you may be able to lower your monthly payments and save thousands of dollars over the life of your loan. However, refinancing federal student loans through a private lender will make the loans ineligible for federal loan forgiveness programs and repayment plans, so it may not always be a good idea.

“For borrowers who currently have federal loans, there’s a lot to consider,” Farrington says. “Will you need an income-based repayment at any time during your loan repayment period? Are you eligible for a rebate program? If so, it may not make sense to refinance.” However, he adds, “for existing private student borrowers, there’s less to worry about – shop around and get the best rate possible.”

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