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Understanding Student Loan Interest Rates

Understanding Student Loan Interest Rates

The Basic Facts of Student Loans

When you’re using a private loan to pay for your education, student loan interest rates are extremely important. Your interest rate will determine the cost of your monthly payments and the overall cost of your loan once it’s paid back in full. So, understanding how rates are set and what you can do to find a less expensive loan is crucial to graduating with manageable debt.


Finding Better Interest Rates

Interest is applied regularly to your student loan. And in most cases, it’s explained in your student loan quotes as an Annual Percentage Rate (APR). The higher the APR, the more you’ll pay your lender by the time your loan ends.

There are a few effective ways to find low student loan interest rates, but first you’ll need to understand how interest rates are set.

Lenders offer different rates based on several factors, including applicants’ credit histories and outside market influences.  Most private student loans are based on either the LIBOR or the Prime Rate indexes.

Consider getting a cosigner, for instance, if you don’t have good credit or if you simply don’t have credit. Decrease the size of your loan by cutting your tuition costs, either by attending a state school or by using community colleges and other resources to handle your undergraduate courses.  Look to federal student loans first, as these have lower, fixed rates.  Exhaust all your options for scholarships and grants as well, as these options combined can save you thousands of dollars.

Finally, you can compare interest rates between several lenders to find the best possible deal. Use a student loan calculator to see how much you’ll pay under each lender’s plan and try to choose a loan that has a low rate and flexible payment terms. The best way to understand student loan interest rates is simply to read through a few quotes, as this will give you an idea of how rates are set and what you can do to get a better deal.

Action Steps

  • Look online for student loan quotes. Quotes consist of an interest rate and an overview of the terms and conditions of a prospective student loan contract. Most lenders offer an easy way to get quotes on their websites.
  • Manage your loan’s size. The best way to save money is to borrow less to begin with. Look for ways to limit the amount of money you’re borrowing and you’ll have more breathing room when your monthly payments start.
  • If you don’t understand any aspect of your loan, talk to your lender. They work with loans on a daily basis and should be able to clear up any confusion quickly and easily.


Tips and Tricks

  1. There are hundreds of great student loan resources online, including loan calculators, credit term glossaries and credit score websites. Use them while you’re comparing rates to make sure that you understand your loan options.
  2. The lender with the lowest interest rate might not always be the right choice. Remember to check into each lender’s payment options, their customer service ratings and their loan contracts’ terms and conditions. A reputable lender with flexible payment options and a good customer service department might be more helpful than a slightly less expensive lender.


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