If you’ve exhausted other options when paying for college, like grants, scholarships, and federal student loans, private student loans might be a good way to fill the gap. Interest rates for private student loans vary from lender to lender but ranged from 3.65% to 15.91% (fixed rates) and 4.99% to 16.20% (variable) on May 3, 2023.
As a result of sky-high inflation, the Fed has increased interest rates to help keep the economy under control. Rates for private student loans will rise, just like they will for federal student loans. By understanding how interest works, you can pay less on your education debt.
When you take out a private student loan, you can choose between a fixed interest rate and a variable interest rate. A fixed rate will stay the same throughout the life of the loan while a variable interest rate can and often will fluctuate based on market conditions.
There are a number of factors that have recently impacted interest rates on private student loans. These include the COVID-19 pandemic, government intervention, and macroeconomic factors.
Private student loan interest rates, like student loans in general, are also typically higher because of the higher risk they create. Since student loans aren’t secured by collateral like personal loans can be, something of value (like a car) can’t be taken in place of default.
Related: Learn more about getting a private student loan on Credible.com
Private student loans depend on market factors as well as your credit and repayment term. Generally, the higher your credit score, the lower your interest rate is likely to be. If you don’t have the best credit, you might have to settle for a higher rate.
| Did you know? The London Interbank Offered Rate (LIBOR) used to be the most important benchmark for setting interest rates on all loans, including student loans. Eventually, Secured Overnight Financing Rate (SOFR) replaced LIBOR. Since it’s calculated based on past transactions, it’s considered less risky. If you have a student loan with a variable rate, SOFR will likely affect it. |
A cosigner can also help you land a lower interest rate and potentially save you hundreds or even thousands of dollars. This person can be a parent, spouse, or friend with good to excellent credit. If you don’t make your loan payments, they’ll be responsible for them.
A fixed rate means your monthly payment amount will stay the same over the course of your loan term. With a variable rate, your payments may increase or decrease based on the market.
While a fixed rate comes with a predictable monthly payment, the initial rate you receive may be higher. On the flipside, a variable rate will likely have a lower initial rate but could change and lead to unpredictable, higher payments.
Whether or not you should choose a fixed rate or variable rate depends on your unique situation and goals. If you like the peace of mind of knowing what your payments will be so you can plan for them, a fixed rate is the way to go.
But if you have wiggle room in your budget and feel confident you can afford higher payments, a variable rate might be worth considering. This is particularly true if you land a low initial rate and plan to pay off most of your student loan at the beginning of your term.
Here are some tips to increase your chances of getting a lower rate on a private student loan.
If you’d like to calculate the total interest on a private student loan, use this formula:
Principal loan amount x interest rate x loan term = interest
A student loan calculator can help you easily estimate your total interest, monthly payments, and the total amount you’ll pay back. To take advantage of it, plug in your loan balance, interest rate, and loan term.
Let’s say you have a loan balance of $55,000 with an interest rate of 6.8% and a 10-year term. In this case, your monthly payment will be $633. You’ll pay a total of $20,953 in interest and $75,953 over the life of your loan.
If you’re hoping to pay less interest on your student loans, consider these student loan payoff strategies.
Related: Learn more about getting a private student loan on Credible.com