If you’re borrowing money for school, student loan interest rates are one of the key criteria you’ll want to consider.
“It’s very important that students know the interest rate on their student loans, because the interest rate will ultimately determine how much interest they’re going to be paying dollarwise over the life of that loan,” said Clint Haynes, certified financial planner and founder of NextGen Wealth.
Understanding student loan interest rates is challenging because there’s not an average student loan interest rate to compare loan offers to. Federal loans offered through the Department of Education have fixed interest rates, while private student loan lenders offer loans at different rates depending on many factors including your credit score, income, and employment history.
To make sure you’re getting the best loan product for your situation, here’s what you need to know about comparing student loan interest rates.
What is the interest rate on student loans?
The interest rate is the amount you’ll pay to borrow money. The Department of Education sets fixed rates each year for different kinds of student loans. This table shows what those interest rates are for student loans in the 2016 to 2017 school year and the 2017 to 2018 school year.
|Loan Type||Borrower Type||School Year 2016-2017||School Year 2017-2018|
|Direct Grad PLUS||Graduate/Professional||6.31%||7%|
|Direct Parent PLUS||Parent||6.31%||7%|
Source: U.S. Department of Education
When you borrow from the Department of Education, you’ll receive a loan at the standard interest rate for your loan type no matter your financial situation or credit score.
When borrowing from private loan lenders, there’s much more variation in student loan interest rates and your financial situation matters a lot when determining your rate. For example, our Private Student Loan Marketplace helps you compare interest rates from different lenders so you can figure out how much you’d pay for private loans.
Why getting a lower student loan interest rate makes a big difference
While you can’t shop around to find a lower student loan interest rate for federal loans since rates are fixed, you can — and should — shop around to find the best rate if you take out private loans. This can help you save thousands of dollars over time.
Shopping around for the best interest rate can make a big difference in how much you pay each month and the total amount it costs you to pay off your loans. Say you had a $20,000 loan at 6.80% with a 10-year repayment term. Your monthly payment would be about $230 per month.
But, if you were able to take a loan with the same repayment term at 4.375%, your monthly payment would come down to around $206 and you’d save $2,898 over the life of the loan.
If you’re comparing two student loans, you can use our student loan interest calculator to help you determine how much a low-rate student loan might save you over the entire loan term.
Should you always take the loan with the lowest interest rate?
When you’re shopping for student loans, knowing what the interest rate is on student loans is important, but a loan’s interest rate is not the only factor to consider.
For example, federal loans can often be a better option for borrowing — even if you could get a lower interest rate on a private student loan — because federal loans have advantages private loans don’t have, such as the opportunity to choose income-driven repayment plans or qualify for the Public Service Loan Forgiveness Program.
If you’re choosing among private loans, you also need to consider factors like the loan repayment term and what your monthly payments will be. If you can get a much lower interest rate on a five-year loan than a 10-year loan, for example, but your payments would be too high for you to afford due to the short repayment period, this loan probably isn’t the best option for you.
And, when comparing rates among private student loans, consider whether the interest rate offered is a variable rate or fixed rate, as sometimes you’re better off choosing a slightly higher fixed-rate loan than a variable-rate loan with a lower rate.
What are variable vs. fixed student loan interest rates?
To understand why you might be better off with a fixed-rate loan, even if the interest rate is slightly higher, it’s important to understand how these different loans work.
- Fixed-rate loans: As the name suggests, interest rates for these loans never change over the life of the loan. The big advantage is that you’ll have predictable payments throughout the life of the loan. However, fixed-rate loans often have higher interest rates to start than variable-rate loans do.
- Variable-rate loans: Unlike fixed-rate loans, variable interest rates can change. “Variable-rate loans are tied to some sort of index rate,” Haynes explained. The loan’s index rate could be tied to LIBOR or the Prime Rate, both of which are averages of index rates. “What that rate does will determine if the interest rate on your loan will go up or down.”
You take a big risk with variable interest rates, because if rates rise, your loan rate — and your payments and the total interest you pay — can increase substantially. Of course, interest rates could also go down and your payments would go down with them, however many experts believe interest rates are trending upward.
“Nine times out of 10, for most folks, the fixed interest rate student loan is going to be better,” Haynes said. He explained that the 2008 to 2009 financial crisis was driven, in part, by many homeowners taking on variable-rate mortgage loans. When interest rates went up, mortgage payments went up and lots of homeowners weren’t able to pay — this same risk of increased interest rates and inability to make payments is also faced by student borrowers who take out these types of loans.
While there might be times when a variable-rate loan makes sense, such as if you know you’re going to be paying off your loans quickly, consider whether the risk of your rate going up is worth it.
Comparing student loan interest rates
Now you know the importance of comparing student loan interest rates, so you can make more informed choices when you shop for student loans or student loan refinancing options.
The important thing to remember is, all other things being equal, a lower student loan interest rate is better than a higher one — but you need to consider all of the terms of the loan including whether the rate is fixed or variable and what your loan repayment options are to ensure you get the best overall deal.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 4/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.24% – 13.24%1||Undergraduate and Graduate|
|4.07% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 11.35%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|6.08% – 7.22%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|