Updated: Apr 08, 2022
What are Pell Grants?
Learn about the Federal Pell Grant, including what it is, how to apply, who is eligible, and whether you need to pay them back with Discover Student Loans.
When you’re searching for funding for college, it can be tempting to gloss over the details of various private student loans. With lots of numbers and seemingly-confusing terms, they all start to sound the same.
Taking the time to understand the terms of private student loans, and what determines your interest rate, can potentially save you money. And understanding how private loans and their interest rates work is less complex than it seems! Let’s dive in.
When evaluating the interest rates of various private student loans, focus in on these three things:
Differences in interest rates can greatly impact the total amount you end up paying. Take these two loans as an example:
The differences in interest rates between loans A and B add up to a whopping $13,951.35 more paid in interest over the life of the loan!
So how do financial institutions determine the interest rates for their private student loans? Here are some factors that can make a difference.
Banks and other lenders set their interest rates based on a combination of factors, including the market and risk assessments. Each lender's criteria and formula for determining your eligibility and interest rate are unique, and as a result, lenders may offer different interest rates on otherwise identical loans. Here are some of the things lenders take into account.
Unlike with federal direct unsubsidized and subsidized student loans, you’ll need to undergo a credit check as part of your application for a private student loan. The lender will look at your credit report, which tells them how you’ve managed credit (such as credit cards or loans) in the past. Your credit report also includes your credit score, a number between 300 and 850 that indicates how risky it is to lend you money.
However, many undergraduate students don't have much credit history, so lenders may also consider information that isn't on your credit report, including your monthly income and expenses.
If you don't have an established or strong credit history, your lender may require a cosigner to qualify for a private student loan. A cosigner can be a parent, family member or friend who takes on the legal responsibility to help repay your loan.
Since the cosigner is also responsible for repaying the loan, their creditworthiness can impact the loan's interest rate. Even if you qualify on your own, applying with a creditworthy cosigner may help you receive a lower interest rate.
Private student loans typically offer a choice of fixed or variable interest rates. A fixed-rate loan will have an interest rate that will not change for the life of the loan. It may be a better option if you want to be certain your interest rate and monthly payments won't change.
A variable-rate loan may start with a lower interest rate than a fixed-rate loan, but the interest rate can change over time. As a result, your monthly payment could decrease or increase as the interest rate changes. With its relatively low initial interest rate, a variable-rate loan could be a good option if you plan to pay your loan off quickly.
The interest rate for private student loans can vary depending on a variety of factors, some of which are beyond your control and others which you may be able to influence. To find the best student loan for you, make sure to read the fine print. And don’t be afraid to call the lender with any questions, or to ensure you fully understand the interest rate and terms of your loan.