Shopping for a college loan can seem daunting. Chances are you want to find the most competitive loan out there that meets your needs. We are ready to help you by providing information you need to evaluate your options.
Ready to apply for a private student loan? Visit Discover Student Loans
Fixed and Variable Interest Rates
Fixed Interest Rates
Fixed interest rates do not change during the life of the loan and your monthly payment amount is generally the same during your repayment period.
Variable Interest Rates
Variable interest rates are tied to an index and change periodically if the index changes.
Variable interest rates are based on either the Prime or LIBOR (London Interbank Offered Rate) Index. As rates change relative to the index, your monthly payment will increase or decrease accordingly. To understand the frequency at which your interest rate is adjusted, make sure you carefully review your loan documents.
Federal Student Loans
Federal student loan interest rates are set on July 1 of every year and the set rate is the same for every borrower.
Private Student Loans
Private student loans are credit-based, so the interest rate is not the same for every borrower. Students with better credit may receive a better interest rate. If you don’t have an established credit history or a low credit score, applying with a creditworthy cosigner may improve the likelihood for loan approval and may lower the interest rate.
How College Loan Interest Rates are Calculated
The amount of interest charged on college loans is calculated as simple daily interest. Simply put, the outstanding principal balance is multiplied by the interest rate and divided by 365 days to calculate one day’s interest amount. So, if you have a $10,000 loan, with a 7.00% interest rate, the formula would be $10,000 x 0.07/365 and the amount of interest that accumulates for one day would be $1.92.
How to Shop for Private College Loans
When shopping for private college loans, while it’s tempting to choose one based on interest rates alone, it’s best to compare them using the Annual Percentage Rate (APR). Unlike basic interest rates, which may not represent the true cost of the loan, the APR takes into account all associated loan costs such as finance charges and loan fees (except penalty charges such as late payment fees). The formula used for calculating the APR also takes into account deferment periods and repayment terms. Each of these factors can have a significant impact on the cost of a loan. The APR adjusts for each of these items, illustrating the true cost of borrowing for your education over the entire life of the loan.
Additionally, since most lenders don’t tell you what your actual interest rate will be until after you submit your application and after they evaluate your credit history, APR examples help you understand the lowest and highest interest rates actually available. This gives you a good idea of what you can expect to pay under those two scenarios. Like most consumers, you can expect to receive a rate somewhere between the lowest and highest rates advertised. These examples also identify the index used and the published rate for that index.
Tip: Most lenders provide APR examples; using them to compare two competing loans will give you a true apples-to-apples comparison of your options. Also take a look at a lender’s reputation and customer service.
More importantly, look at borrower benefits such as interest rate discounts for repaying your loans through an auto-debit program. These types of benefits help lower your interest rate when you’re repaying your loans. For a complete list of key differentiators, read How to Choose a Private Student Loan.
For more information on private student loans, visit Discover Student Loans