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Student loan interest rates vary between federal student loans and private student loans. The federal government has suspended payments and waived interest until the end of 2020 for borrowers on current federal loans in repayment due to the coronavirus pandemic. If you are in school, need to borrow private student loans, or plan to refinance, your interest rates will be different.
What are the interest rates for student loans?
Interest is what you pay your lender back for taking out a loan. Your lender can be a bank, a credit union, or another institution, such as 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 interest rates on student loans
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 used up all of your federal funds through the Free Application for Federal Student Assistance, or FAFSA.
When you complete the FAFSA, you are approved for federal scholarships, grants, work-study opportunities, and student loans. If you don’t complete the FAFSA, or if your expected family contribution is more than your means, 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 than federal student loans. Additionally, most private student loans do not offer the same flexible repayment plans available from federal lenders, such as income-based repayment plans.
How are student loan interest rates 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 will not change during the life of the loan, unless you consolidate through a direct consolidation loan or your loans become private through refinancing.
If you are applying for subsidized and unsubsidized loans, your interest rate does not take into account your credit score. However, if you need a PLUS loan, you will be subject to a credit check. If you have any marks against your credit, such as delinquent loans, repossession, or bankruptcy, you may not be approved for a PLUS loan.
This is also important for parents who take out PLUS loans on behalf of their dependent child who is attending university. If you don’t have a strong enough credit score to qualify, you may not be able to get PLUS loans for your child.
Private student loans
If you have to take out private student loans, the interest rates are based on your credit score and history. If you are a student with very little or no credit in your name, you may find it difficult to borrow private student loans and may need a co-signer.
If you are a co-signer with a college student, your credit score can be a determining factor not only in qualifying for a student loan, but also in securing the lowest interest rate available. The higher your credit score, the lower your interest rate. The lower your score, the higher your interest rate. On top of that, poor or fair credit could mean that you can’t borrow as much as you need to pay for your education.
How to apply for a student loan
If you need the money to pay for your education, try to get as much free money as possible – money that you don’t have to pay back. It comes through scholarships, grants, and whatever money you or your family has saved for school. Once these resources are exhausted, you can apply for federal and private loans.
1. Fill out the FAFSA
Start with federal student loans. These loans are the most user-friendly because they tend to have the lowest interest rates, generally don’t base your interest rate on your credit score, and have many repayment options. If it’s time to pay off your student loans and you need a new plan, you are spoiled for choice, from standard repayment plan to phased repayment plan to multiple income-based repayment plans. (IDR).
To apply for student loans, complete the FAFSA. And, if you want to continue receiving money, you will need to complete a FAFSA each year that you are enrolled at least part-time. Since some student aid is awarded on a first come, first served basis, the earlier you apply, the more help you could get through scholarships and grants. If you’re a dependent student, your parents will need to have the last two tax returns handy, along with W-2s, pay stubs, and asset information.
2. Look for private student loans
If you don’t have enough money to pay for your education with free money and federal student loans, you may need to apply for private student loans. You can compare many different lenders before you apply 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, find out which lenders have prequalification options that let you see your chances of qualifying without applying for a loan and without triggering a credit check. Serious inquiries temporarily lower your credit score and stay on your credit report, so you’ll want to limit loan applications until needed. If you apply for a private student loan and are turned down, you will have to apply elsewhere and you will still have your credit report seriously investigated. Apply with caution.
3. Apply for private loans
There is no universal demand for a private student loan; each lender has their own application process. You will need to fill in 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 who does.
A co-signer can help you qualify for a student loan if you don’t have a good enough credit rating to qualify on your own. But when it comes to paying off your student loans, one missed payment can hurt both of you. Not only will your credit score go down, but your co-signer’s score will go down as well. Keep this in mind when exploring private student loan options.
Find 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 plenty of repayment options when the time comes to pay them back.
Finding the cheapest student loans through private options can seem daunting, as you will have to compare many different lenders. Look at what you need to qualify for the cheapest loans available, including your credit score and the amount you are borrowing. Evaluate which ones have the least fees, if any, like origination, late payment, or prepayment fees. The less a lender charges, the less you will pay over the life of the loan.
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