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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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When you take out a student loan, you agree to repay more than just the amount you borrow. In exchange for lending you the money, the lender will charge an interest fee, which can significantly affect how expensive your loan is and how long it takes to pay off.
All lenders use different criteria to determine your student loan interest rate, so it’s important to compare multiple loan offers. Before taking out a student loan, make sure that you understand how interest rates work and how they can affect your student loan repayment.
Interest is the extra cost that lenders charge you to borrow money, expressed as a percentage of the principal amount of your loan. Your interest rate has a huge effect on your student loans. The higher the rate, the more interest you’ll pay every month. A borrower with a higher interest rate will have higher monthly payments than a borrower with a lower rate, even if they both took out the same amount originally. A higher rate also increases the overall cost of your loan.
Typically, choosing a longer repayment term will give you a higher interest rate and vice versa. However, your interest rate also largely depends on your credit score, income and more.
In general, interest on a student loan compounds monthly, which means that the amount you pay in a given month is based on the remaining loan amount.
Student loan interest rates come in one of two forms: fixed or variable. With many lenders, borrowers can choose between fixed and variable rates when they select a loan. They can also refinance to a fixed or variable interest rate later on.
As the term suggests, fixed interest rates remain the same for the life of your loan, which means that your monthly payment will also stay the same. Fixed interest rates provide more certainty, which is worthwhile if you’re not much of a risk-taker.
With variable interest rates, your interest rate can change over time as the current student loan interest rates on the market go up and down. In general, variable interest rates start out lower than fixed interest rates, making them more attractive. But they could become more expensive in the long run, especially if you have a long repayment term.
That said, if you have a short repayment period and market rates don’t increase too much during the term, a variable interest rate could ultimately save you money.
Student loans can come from either the U.S. Department of Education or private lenders. Federal and private student loans determine interest rates differently.
Federal student loan interest rates are set by Congress. The rates are standardized, which means that everyone who qualifies for a loan in a given year pays the same interest rate. However, federal student loan interest rates typically change from year to year.
Here’s how rates have changed in the last five years:
Note: New rates take effect July 1 of each year.
Unlike the federal government, private lenders use risk-based pricing to determine student loan interest rates. You must be manually approved by the lender, and your interest rate will be determined by factors like your credit score, income, other debt payments and more. If you’re having trouble qualifying for the lowest rates on your own, you can always recruit a qualified co-signer.
As of April 13, 2022, rates from top lenders range from 0.94 percent to 12.99 percent.
Most experts recommend that you max out your federal loans before taking out a private student loan. Private loans carry more risk than federal loans because they don’t provide protections like access to income-driven repayment plans, forbearance and deferment options or student loan forgiveness programs.
The factors that determine your student loan rates depend on the type of student loan you take out. With federal loans, the two primary factors are the type of loan you apply for and when the loan is disbursed.
With private student loans, multiple factors go into that decision, including:
It’s also important to keep in mind that the length of time you take to repay your loan has a significant impact on how much interest you’ll pay in total. For example, if you choose a 20-year repayment plan over a 10-year plan, you’ll end up paying more money overall because of the extended timeline.
What counts as a good rate largely depends on the interest rate market at the time you apply. In some markets, 7 percent might be a great deal, while in others, 2 percent might be a plausible rate.
To get a measure of how good an interest rate is, one thing you can do is compare it to the federal student loan rate. Federal loans typically have reasonable interest rates. To get a similar or better rate on a private loan, especially a fixed-rate loan, you need to have very strong credit.
A “good” interest rate can also look different for each borrower. A borrower with an average credit score or a short credit history should not expect to receive the lowest rates advertised; in this case, finding the best interest rate for their financial situation requires comparing personalized offers from several different lenders.
Calculating interest on your student loans can help you determine how much your loans will cost and show how much you could save by paying more each month. If you want to save some time, use an online calculator to do the math.
If you want to do it on your own, the process requires just three steps:
Keep in mind that as your principal balance goes down, so will the amount you pay in interest. Also note that if you have a variable-rate loan, your interest rate will fluctuate. Finally, if your lender charges compound interest, you’ll pay interest on both the principal loan amount and any unpaid interest accrued, which would increase your monthly payment.
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