Updated: May 12, 2023
Article highlights
- Private student loan interest rates can vary widely by lender.
- Your creditworthiness and the creditworthiness of your cosigner both play an important role in determining interest rates.
- Fixed interest rates remain the same throughout the life of the loan while variable rates may change periodically.
When you’re looking for ways to pay 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 private student loan interest rates can potentially save you money—and it’s less complex than it seems.
How much are student loan interest rates?
When evaluating private student loan interest rates, focus in on these three things:
- 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).
- 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. The higher the APR, the more you’ll pay to borrow.
- Fixed vs. variable interest rates: This tells you whether 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 on changes to the interest rate index it is tied to.
Differences in interest rates can greatly impact the total amount you end up paying. This private student loan interest rate comparison is a good example:
| An undergraduate loan, taken out freshman year and with an in-school deferment of 4-years and 6-month grace period (i.e., a period of time after you graduate during which you don’t need to make student loan payments) | ||
| Loan A | Loan B | |
|---|---|---|
| Loan amount | $10,000 | $10,000 |
| Interest rate | 6.49% (fixed) | 12.49% (fixed) |
| Term | 15 years | 15 years |
| Monthly payment | $111.05 | $188.60 |
| Total interest paid over the loan’s lifetime | $9,992.00 | $23,943.35 |
The differences in interest rates between loans A and B add up to $13,951.35 more paid in interest over the life of the loan.
So what determines the interest rate on many private student loans? Here are some factors that can make a difference.
Factors used by student loan providers
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. As a result, lenders may offer different interest rates on otherwise identical loans. Here are some of the factors lenders typically consider.
1. Your creditworthiness
Unlike some federal 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, any debt, and expenses. All of these details can influence private student loan interest rates.
2. Your cosigner’s creditworthiness
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 responsibility to help repay your loan.
Since the cosigner is also responsible for repaying the loan, their creditworthiness can impact private student loan interest rates. Even if you qualify on your own, applying with a creditworthy cosigner may help you receive a lower interest rate.
3. Type of interest rate
Private student loans typically offer a choice of fixed or variable interest rates. A fixed interest rate will remain the same throughout the life of the loan. It may be a good option if you want to be certain your interest rate and monthly payments won't change.
A variable interest rate may change periodically throughout the life of the loan. As a result, your monthly payment could decrease or increase as the interest rate changes. If you plan to pay your loan off quickly, then choosing a variable-rate loan with a relatively low initial interest rate could be a good option.
The bottom line
Private student loan interest rates can vary depending on a variety of factors. Some may be beyond your control—others 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 so that you fully understand the interest rate and terms of your loan.
