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.

How much are student loan interest rates?

When evaluating the interest rates of various private student loans, focus in on these three things:

  1. The interest rate: This is the cost of borrowing money and is expressed as a percentage that is applied to the unpaid principal amount of the loan (what you owe).
  2. The annual percentage rate (APR): This number takes into account the interest rate of a loan, as well as other factors that affect the total cost of borrowing, such as fees and costs associated with deferment options (which allow you to put off making payments while enrolled in school at least half-time). The higher the APR, the more you’ll pay to borrow.
  3. Fixed vs. variable interest rates: This tells you whether or not the interest rate on your loan will stay the same or change over time. A fixed-rate loan does not change over the life of the loan. The interest rate on a variable-rate loan may increase or decrease depending upon changes to the interest rate index it is associated with.

Differences in interest rates can greatly impact the total amount you end up paying. Take these two loans as an example:

Loan A

  • Loan amount: $10,000 undergraduate loan, taken out freshman year and with an in-school deferment of 4-years and 6-month grace period (a period of time after you graduate during which you don’t need to make loan payments)
  • Interest rate: 6.49 percent (fixed)
  • Term: 15 years
  • Monthly payment: $111.07
  • Total interest paid over the loan’s lifetime: $9,991.98

Loan B

  • Loan amount: $10,000 undergraduate loan, taken out freshman year and with an in-school deferment of 4-years and 6-month grace period (a period of time after you graduate during which you don’t need to make loan payments)
  • Interest rate: 12.49 percent (fixed)
  • Term: 15 years
  • Monthly payment: $188.53
  • Total interest paid over the loan’s lifetime: $23,943.33

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.

The Lender: Factors Used By Student Loan Providers

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.

Your Creditworthiness: Student Loans and Your Credit Score

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.

The Creditworthiness Of Your Cosigner

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.

Type of Loan: Fixed or Variable Student Loan

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 Bottom Line

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.


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