When looking over your student loan offers, there will be a few numbers to look out for. The main one is the principle loan amount, which is the amount the lender is willing to give you. However, just as important is the APR or interest rate. But how do you know what is a “good” student loan interest rate?
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What Determines an Interest Rate
What is a good student loan interest rate? Before applying for a loan, it’s important to understand what determines your interest rate offers. For federal student loans like direct subsidized loans and direct unsubsidized loans that are received through FASFA and CSS, interest rates are fixed by the government. These can only be changed by Congress and federal law.
Private student loans on the other hand are determined by the institution, generally banks and college credit unions. Each lender has different requirements and criteria that decides your offered interest rate. For most undergraduates without a job or a way to repay a loan, you will most likely be co-signing a loan. This is usually a parent or guardian. The interest rate is then determined by you or your co-signer’s credit score, income, debt, and ability to repay the loan.
What Are The Federal Loan Interest Rates?
When you pay for college, you’ll find out that federal loans’ interest rates are almost always lower than private loans. They are fixed for the lifetime of the loan, but the actual rate differs between loan types. Direct subsidized loans (interest starts after you leave school) and direct unsubsidized loans (interest begins to accrue immediately) both have the same rates for undergraduates: 3.76%. This rate will continue until July 1st, 2017. After this date, the rate may change if the law is altered.
There are separate interest rates for direct subsidized loans for graduates (5.31%) and direct PLUS loans for parents, graduate students, and professional students (6.31%).
What are the Private Loan Interest Rates?
Although the federal loan interest rates will generally be less than private loans, the federal loan amounts may not be enough to cover your entire college tuition. In this case, many students turn to private loans. Currently, the industry average for these loans is 9% to 12%, but in many cases, lower rates may be found.
It’s also vital to check if the private loan has a fixed or variable APR. A fixed interest rate will not change over the lifetime of the loan while a variable rate will change over time with the market. In some cases, variable interest rates can actually be as low as 3% at first, less than a federal loan, but they won’t stay this rate. For example, they may jump to 10% in a few years. It is possible to find low fixed interest rates, but this really depends on your or your co-signer’s ability to pay back the debt.
So, What is a Good Student Loan Interest Rate?
Finding a “good” student loan rate may be difficult, as the government, banks, and credit unions will give you different options. It’s always important to look further than the principle loan amount and interest rate you are given. Don’t take the first loan that is presented to you. By doing your research, you can find if it is the best option available for you and your family.
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