Changes in interest rate indexes can be hard to predict since all sorts of complex factors like the economy and inflation influence them. Since variable interest rate increases are unpredictable, your monthly payment may increase during the life of your loan.
How Are Interest Rates Determined?
Whether you're looking for a fixed or variable rate student loan, your interest rate will be determined after you apply. How the interest rate is determined can depend on several factors.
Federal student loans have fixed interest rates. Federal law sets the rates, which vary depending on the type of loan and when you first receive your disbursement, but not your creditworthiness.
For private student loans, rates can vary depending on the lender and your creditworthiness, which may include your credit score, credit history, income, and other outstanding debt. These can also play a significant role in determining your eligibility for a loan and the rate you receive.
Having a creditworthy cosigner, especially if you don’t have an established credit history, may improve your likelihood for loan approval and may lower your interest rate. Even if you qualify on your own, you may receive a lower interest rate by adding a cosigner.
How Does Student Loan Interest Work?
Most lenders allow you to postpone making payments while enrolled in school at least half-time and during your grace period. While you are in school and during your grace period, interest accrues daily. When it’s time to start making payments, the accrued interest is added to your principal balance—or "capitalized." Your interest rate will apply to this new, larger principal balance. This will increase the amount of your monthly payment and the total cost of your loan.
If you choose an in-school repayment option, you can reduce the amount of interest by making payments while in school and during your grace period. Regardless of which repayment option you choose, you can always make payments at any time with no pre-payment penalty.
Choosing a Loan That's Right for You
With an understanding of key terms and concepts, and how student loan interest works, you can start evaluating private student loans and comparing lenders. To determine which lenders are a good fit, look at the loan options, APR ranges, and additional benefits.