Understanding Student Loan Interest Rates

Understanding Student Loan Interest Rates

There are lots of things to consider when evaluating student loans. The interest rate is an important factor to compare because the interest rate affects the total cost of your loan.

Many private loan lenders provide the choice of a fixed or variable interest rate. Make sure you understand the differences between the two types of loans to determine which loans best fit your needs.

Fixed Interest Rates

A fixed rate loan has a static interest rate throughout the life of the loan. Fixed interest rates provide a sense of stability because you know how much you'll pay each month. Although your interest rate remains the same, your monthly payment can change if interest is capitalized following a period of deferment or forbearance, or if you qualify for an interest rate reduction benefit.

Variable Interest Rates

The interest rate on a variable rate loan is tied to an index and will change periodically if the index changes. Variable interest rates are based on either the Prime Index or the London Interbank Offered Rate (LIBOR) Index.

Variable interest rates tend to start lower than fixed interest rates, but may increase over the life of the loan. Interest rates will increase or decrease if the index increases or decreases. Similarly, your monthly payment will increase or decrease if the interest rate increases or decreases. Your monthly payment can also change if interest is capitalized following a period of deferment or forbearance, or if you qualify for an interest rate reduction benefit.

Did You Know?

Be sure to look at the Annual Percentage Rate (APR) to accurately compare loan options. The APR represents the annualized cost of credit, and considers finance charges (interest, fees and other charges) and whether payments are deferred during school. As a result, the APR may be higher or lower than the interest rate.