Student loan interest rates vary between federal student loans and private student loans. The federal government has halted payments and waived interest through the end of 2020 for current federal loan borrowers in repayment because of the coronavirus pandemic. If you’re in school, need to borrow private student loans or are planning to refinance, your interest rates will look different.
What Are Student Loan Interest Rates?
Interest is what you pay back your lender for taking out a loan. Your lender can be a bank, credit union or another institution, like the federal government.
Interest rates are not the same for all student loans. They differ between the few types of federal student loans and by private student loan lenders.
Current Student Loan Interest Rates
While most student loans are granted at the federal level, some students need to borrow more or use other resources. Private student loans are a good option if you’ve exhausted all your federal funding through the Free Application for Federal Student Aid, or FAFSA.
When you complete the FAFSA, you’re approved for federal scholarships, grants, work-study opportunities and student loans. If you don’t complete the FAFSA or your expected family contribution is more than you can afford, you may need to apply for private student loans.
These types of loans come from banks, credit unions or online lenders. They tend to have higher interest rates compared to federal student loans. Plus, most private student loans don’t offer the same flexible repayment plans available from federal lenders, like income-driven repayment plans.
How Student Loan Interest Rates Are Set
Federal student loans and private student loans set their interest rates differently.
Federal Student Loans
At the federal level, student loan interest rates are set by Congress. They are always fixed—not variable—and won’t change over the life of the loan unless you consolidate through a direct consolidation loan or your loans become private through refinancing.
If you’re applying for subsidized and unsubsidized loans, your interest rate doesn’t take your credit score into account. However, if you need a PLUS loan, you’ll be subject to a credit check. If you have marks against your credit—like loans in default, repossession or bankruptcy—you might not get approved for a PLUS loan.
This is also important for parents who are taking out PLUS loans on behalf of their dependent child attending college. If you don’t have a strong enough credit score to qualify, you might not be able to get PLUS loans for your child.
Private Student Loans
If you need to take out private student loans, interest rates are based on your credit score and history. If you’re a student with very little—if any—credit to your name, you may have a hard time borrowing private student loans and might need a co-signer.
If you’re a co-signer for a student attending college, your credit score can be a determining factor in not only qualifying for a student loan but also getting the lowest interest rate available. The higher your credit score, the lower your interest rate. The lower your score, the higher your interest rate. Along with that, poor or fair credit could mean you can’t borrow as much as you need to pay for school.
How to Apply for a Student Loan
If you need money to pay for school, try to get as much free money as possible—that is, money you don’t have to repay. This comes through scholarships, grants and any money you or your family has saved for school. Once these resources are exhausted, you can apply for federal and private loans.
1. Complete the FAFSA
Start with federal student loans. These loans are the friendliest because they tend to have the lowest interest rates, don’t typically base your interest rate on your credit score and have plenty of repayment options. If the time comes to repay your student loans and you need a new plan, you have a lot to choose from, from the standard repayment plan to the graduated repayment plan and several income-driven repayment (IDR) plans.
To apply for student loans, complete the FAFSA. And, if you’d like to keep receiving money, you’ll need to complete a FAFSA every year you’re enrolled at least half-time. Because some student aid is first come, first served, the earlier you apply, the more aid you might get through scholarships and grants. If you’re a dependent student, your parents will need to have the last couple tax returns handy, as well as W-2s, pay stubs and asset information.
2. Research Private Student Loans
If you don’t have enough money to pay for school through free money and federal student loans, you may need to apply for private student loans. You can compare many different lenders before applying to see which ones offer the lowest interest rate, offer a grace period like federal student loans and offer help in case you can’t make payments.
Also see which lenders offer prequalification options that let you see your qualification chances without applying for a loan and triggering a hard credit check. Hard inquiries temporarily cause your credit score to drop and stay on your credit report, so you’ll want to limit loan applications until it’s necessary. If you apply for a private student loan and get denied, you’ll need to apply elsewhere, and you’ll still have a hard inquiry on your credit report. Apply with caution.
3. Apply for Private Loans
There isn’t a universal private student loan application; each lender has its own application process. You’ll need to complete personal and financial information. If you don’t have a strong enough credit history to qualify for a private student loan, find a co-signer that does.
A co-signer can help you qualify for a student loan if you don’t have a good enough credit score to qualify on your own. But when it comes time to repay your student loans, one missed payment can hurt both of you. Not only will your credit score drop, so will your co-signer’s score. Keep that in mind as you explore private student loan options.
Finding the Cheapest Student Loans
The cheapest student loans are federal student loans. They have the lowest interest rates, offer a six-month grace period and have many different repayment options when it comes time to pay them back.
Finding the next-cheapest student loans through private options can seem daunting because you’ll need to compare many different lenders. Look at what you need to qualify for the cheapest loans available, including your credit score and how much you’re borrowing. Evaluate which ones have the fewest—if any—fees, like origination, late payment or prepayment fees. The fewer fees a lender charges, the less you’ll pay over the life of the loan.
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