Interest rates have a big affect on the overall cost of your student loan. Have you ever wondered how the interest rates are calculated?
How Federal Loan Interest Rates are Calculated
The government sets the interest rates and terms and conditions on Federal loans. This includes Parent PLUS loans, so if you are a parent of a student who took out loans to help your child, this applies to you as well.
The government uses a calculation that takes into account the 10-year Treasury note plus a percentage. Federal loan interest rates are usually set in spring before the new academic year starts. Once the interest rate is set for the year, it applies to all student borrowers and the rate remains unchanged for that entire academic year.
How Private Loan Interest Rates are Calculated
Interest rates on private student loans are not linked to rates on federal loans. Private lenders calculate interest rates very differently. Every lender uses their own criteria for determining a range of interest rates for the year. When you apply for a private loan, the rate you are offered will depend on your creditworthiness, and a few other factors.
Having a good credit history shows that you’re a reliable borrower and may qualify you for a lower rate. If you don’t have a strong credit history, most lenders will quote a higher rate to cover their risk. In this case, the only way to get a better rate is by having a cosigner with an established history.
Private loans also offer two different types of rates—variable and fixed. Variable rates will fluctuate throughout the year, but has the chance to be lower. Fixed rates remain the same throughout the year, offering stability and consistency.