Refinancing with Earnest
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When I finished my graduate program at Syracuse University, the interest rate for federal Stafford Loans (now called Direct Loans) was 2.77%. I consolidated the loans and locked in a low interest rate — one that decreased when I agreed to automatic withdrawal.
On top of that, after I made 36 on-time payments, I received another drop to my interest rate. It’s why I now pay 1.9% APR on my student loans and have no intention of paying them off early.
But why do I have such a low interest rate on my student loans while my ex, who consolidated his federal loans eight years after I did, pays an interest rate of about 5%?
The answer lies in the way student loan rates are set, and the changes to the way they have been set over time.
Factors that affect interest rates for federal loans
Federal student loan interest rates are set by Congress. In the past, rates were set somewhat sporadically.
Today, thanks to the Bipartisan Student Loan Certainty Act of 2013, Congress is required to set new loan rates for the following school year every spring. The rates are good for the life of the loan, and the award year runs from July 1 to June 30.
Congress sets rates depending on the type of loan, taking into consideration whether the loan is for graduate or undergraduate students and whether the loan is subsidized or not.
Direct PLUS Loan rates are also set at this time. Federal Perkins Loans were set to 5% all the time, but the program expired on Sept. 30.
When Congress decides what rate to set, it looks at the financial markets — particularly the rate of 10-year Treasury notes — and adds a premium. The 2013 law requires student loan interest rates to follow market trends.
This explains why rates for the 2016-2017 school year are relatively low at 3.76% for undergraduate loans and 5.31% for graduate loans. With rates low and the financial markets still in recovery mode, student loans follow suit.
However, it’s worth noting that, as the economy improves and markets become more confident, student loan interest rates are likely to rise. In light of this, it’s probably a good thing the 2013 law also put caps on how high the rates can go:
- 8.25% for undergraduates
- 9.5% for graduates
- 10.5% for PLUS loans
Consolidating your federal student loans
When you consolidate your loans, the process is a little different than it used to be. I was able to lock in a low interest rate with a private loan servicer when I finished in 2005. Things were different by the time 2013 rolled around and my ex consolidated his loans.
Now, you consolidate your federal student loans through the direct program. When you consolidate this way, your new interest rate is an average of the rates on your original loans.
Each year you were in school, you got new loans at new rates. Because my ex’s student loans ranged from 3.76% to 6.80%, he ended up with a rate in the 5% range for his consolidation.
Federal student loans don’t come with a refinancing program; you can only consolidate. However, there are additional protections with federal loans, including income-based repayment.
Factors that influence interest rates for private loans
The story is a little different when you look at private loans.
Federal student loan servicers have to follow the guidance from Congress. However, private lenders have no such requirements. This is why, when I had a private student loan, I paid 6.8% APR (and why I decided that one was worth paying off quickly).
Private lenders often set their rates based on either the Prime Rate set by the Federal Reserve, or the London Interbank Offered Rate (LIBOR). A premium is, once again, added to the base rates offered by private lenders.
The Prime Rate and the LIBOR are set based on financial markets, economic conditions, and the ways the setting authority wants to pursue monetary policy.
However, there are other factors that affect interest rates on private loans, including whether you choose a fixed or variable rate and your credit history. Because private lenders are very interested in getting their money back, your credit history is going to be the most important of the factors that affect interest rates.
While it’s possible to get low rates with a private lender — perhaps better rates than what you would get with federal loans — it’s important to realize that the low advertised rate isn’t guaranteed.
There aren’t credit requirements to federal student loans. When you apply for a federal loan, you automatically get the rate set by Congress.
With private student loans, though, your credit matters a great deal. If you want to get a good rate on a private student loan or refinance, you need to build your credit.
Your best bet is to compare interest rates and shop around when you decide to apply for a private student loan, whether you are getting a new student loan or refinancing existing loans.
Student loan interest rates are always changing. It’s important to pay attention to the rates when you get your student loans, and also know what influences interest rates. You’ll have a better idea of what to expect as you plan your education.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|