Because of the variety of federal and private student loans available, finding the best student loan interest rates can be confusing. This is further compounded by the need to compare fixed and variable interest rates.
Today, millions of people are saddled with student loan debt – a burden that can literally follow you around for the remainder of your lifetime if you are unable to pay back these borrowed funds in a timely manner.
One of the biggest reasons why this debt in particular can be so burdensome is because many people accept the interest on student loans, as well as the other loan terms, without question upon origination. Then, when it comes time to repay these funds, indebted college students experience financial hardship and the inability to make payments.
Here’s some background information on private and federal student loan interest rates, including the average rate in the industry, to help you find the lowest cost student debt for your education.
Determining Student Loan Interest Rates
Contrary to what some borrowers may believe, it is not the loan servicer that sets the interest rate on student loans – at least not the Federal Direct Loans. Nor can the loan servicer make changes to these student loan interest rates.
Rather, it is the U.S. Congress that sets the interest rates on the Direct Loans from the United States Department of Education via legislation that actually ties the interest rate to financial markets.
Federal Student Loan Interest Rates
The average interest rate on student loans (for Federal Direct Student Loans with a first disbursement date between July 1, 2016 and June 30, 2017) will vary based on the type of student loan that you are applying for.
However, for Federal Direct loans, the current student loan rates are:
- Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students – 3.76%
- Direct Unsubsidized Loans for Graduate and Professional Students – 5.31%
- Direct PLUS Loans for Parents of Undergraduate Students – 6.31%
- Direct PLUS Loans for Graduate / Professional Students – 6.31%
Average Student Loan Interest Rates From Private Lenders
Because private lenders can set their own rates according to their underwriting standards, the average student loan interest rate for private lenders varies greatly. Private student loans tend to have higher interest rates than federal loans, with the industry average between 9% and 12%.
In addition to the interest rate depending on the lender, choosing a fixed or variable rate will affect your interest payments in the future. The rates can also be based on whether or not you have a cosigner, the amount that you are borrowing, and on the strength of your credit.
Can You Change Your Student Loan Interest Rate?
When you take out a Federal student loan, the interest rate on that loan is fixed for the life of the loan. That means that you cannot change the interest rate on that particular loan, nor will that rate adjust.
You can, however, obtain a lower student loan interest rate by refinancing with a private lender, provided that you qualify. Private student loans may be obtained through banks and other traditional lenders.
Private Student Loan Interest Rates
The interest rates on private student loans can be either fixed or variable. Oftentimes, the fixed rate loans that are offered by private lenders are somewhat competitive with the Federal PLUS loans for parents and undergraduates.
Loan Origination Fees
In addition to the interest rate that is charged on Federal PLUS loans, however, there is also a loan origination fee that can range between 4.272% and 4.276%, depending on the loan’s first disbursement date.
Because of the additional loan origination fee charged for the Federal PLUS loan, it could actually be cheaper in the long run to obtain a private student loan – depending on other factors, such as credit, income, and overall financial stability.
Variable Interest Rates
Private lenders may also offer student loans with variable interest rates. A variable interest rate will generally fluctuate throughout the lifetime of the loan. Currently, variable interest rates are still sitting at historic lows – and because of that, it may be possible to obtain a rate on a variable rate private loan that is below that of a Federal PLUS loan.
However, even though you may be able to obtain a private student loan that comes with a low initial variable interest rate, it is important to be careful, as the rate could rise considerably over time and make your payments unmanageable.
This is why is it essential to read over any and all loan information that you receive prior to moving forward with changing and / or obtaining a student loan. This includes loans from both Federal and private sources.
Student Loan Consolidation
Another potential option you may have for lowering your student loan interest rate is to consolidate multiple student loans – especially those student loans with higher rates of interest – into one single private loan with a lower interest rate. If done properly, this can potentially save you a great deal over the life of the loan.
If you opt to go this route, you will want to be sure that, while you may be saving money on your monthly payment, the new loan could end up costing you by having a much longer term. With that in mind, make sure that you calculate your total cost of the new consolidation loan as versus what it will cost you to keep your current loans. If it turns out that the new, single loan is cheaper in the short and long run, then you should take steps to move forward with it.
Having a good understanding of the interest rates on your student loans can be an important first step in your overall financial success. One reason for this is because the interest rate on student loans is a key determinant of what your monthly amount will be when the time comes to start repaying the balance.
Keeping your payment low can help to ensure that you don’t get into financial difficulty right out of the starting gate as you exit college and begin your career. A low interest rate can allow you the ability to pay your student loan off faster – something that all borrowers ideally strive for. Lower student loan payments can also mean the ability to move forward financially with other important endeavors, such as saving for a home and investing for the future.