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
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
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
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.
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
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.
- Home & Business Finances
- A Guide to Student Loan Interest Rates
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