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A Guide to Student Loan Interest Rates

Student loan interest rates are specially designed for education loans as a type of financial aid which is repaid with lower interest than usual loans. While the private sector is open, federal law has set maximum interest rates and fees which lenders must adhere to for federally-guaranteed loans. However, lenders may charge less interest if they wish. Student loans are in three major categories: Stafford and Perkins loans (student loans), PLUS loans (parent loans) and alternative, or private student loans. Lastly, there is the consolidation education loan, which allows for the borrower to lump all loans into one place for simplification.

College Loan Interest Rates

Private college loans use variable interest rates based on either the Prime or LIBOR (London Interbank Offered Rate) index. As is the case with most loans, private college loans are credit-based. Therefore, the better your credit history is, the better your rate will be. The interest rates fluctuate along with their relative index. As rates change, monthly college loan payments increase or decrease. Always review the loan documents thoroughly to understand how the interest rate is adjusted. Without an established credit history or with a less-than-perfect credit rating, you can enlist a qualified co-signer to increase the chance of approval and qualification for lower interest rates.

Federal Education Loans

Currently since July 1, 2010, all federal education loans are made through the Direct Loan program. The loans offered through an educational institution's financial aid office are provided with funds from the U.S. Department of Education.

The interest rate on the Federal Direct PLUS loan is 7.9%, but the approval rate is higher. The terms offered in connection with the Federal Stafford and Consolidation loans are similar to previously offered federal education loans through other federally-guaranteed student loan programs. In addition, you can avoid negative amortization by making payments during in-school and grace periods. This offers borrowers a savings and the ability to pay off debt more quickly.

Shopping Around

Evaluate the options for private college loans. Compare them using the Annual Percentage Rate (APR). Unlike interest rates, the APR considers all associated loan costs like finance charges and loan fees for a more accurate reading of the actual cost. Since most lenders do not disclose what the actual interest rate will be until after the application is submitted and evaluated, ask for APR examples to help understand what the lowest and highest interest rates may be.


Deal with student loan lenders that are experienced and well-trained. This can make a huge difference in how the rate is calculated and how adequate the student loan is. Knowledgeable representatives usually have more answers to questions and can serve to be valuable financial allies. They can also explain how the interest rates are calculated and how to repay the loan more effectively, as well as how to avoid late or missed payments.

Borrower Benefits

Review borrower benefits like interest rate discounts when repaying loans through an auto debit program. These incentives can help lower interest rates substantially. Be realistic about being able to take advantage of benefits so that you do not miscalculate the cost based on a benefit that you may not actually qualify for.

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