Understanding rates is an integral part to getting the most out of your student loans as a borrower. By knowing what to expect, and why to expect it, you’ll be more empowered each payment period to pay down your debt with greater success.
Your interest rate determines the amount, or “finance charge,” that you pay to borrow the money you’re taking out from either the Federal government or a private lender. With many lenders, your payment will first be applied to your interest charges before being applied to the principal balance of your loan for each payment period. Generally, your “interest rate factor” is derived from dividing your interest rate by the number of days in the year. Then, the factor is multiplied by the number of days since your last payment. This then equals how much interest you are charged for that period. Many lenders also advertise Annual Percentage Rates, or APRs. The APR is a good indicator of the total cost of a loan, since it includes any fees or other associated costs vs. just the interest payment.
A fixed interest rate loan is more stable than a variable — it remains the same for the entire duration of the loan, and cannot fluctuate based on market conditions. A variable interest rate loan (currently only offered through private lenders) can sometimes be lower than a fixed. If they don’t rise by much over time, you could possibly save money this way, but as mentioned, it carries greater risk. A private lender will base the loan rate on the index it uses — often the LIBOR (see below) — plus their chosen margin. Adding the index rate to the margin rate creates the loan rate. For example, if the three-month LIBOR is 1.70%, and the chosen margin 2.5%, the loan rate would be 4.3%.
A note about LIBOR: The London Interbank Offered Rate (“LIBOR”) benchmark used as the Index for this loan is likely to be discontinued after 2021 or perhaps sooner. Should LIBOR no longer be available, an alternative published benchmark will be selected to serve as the Index.
When choosing between variable or fixed rate loans, think about whether having some uncertainty in the mix is worth the potential savings. For example, if you plan on paying off the loan quickly and have the means to do so, a variable rate could be a smart choice that ultimately saves you money.
How To Find Your Best Student Loan Refinance Rates
There are many factors that go into an offered rate for refinancing your student loans, including the type of loan, your financial history, credit score, and more. Here is a breakdown of some loan types to help you understand what goes into pricing, and which type of loan could get you the right rate and terms for your situation.
Federal vs. Private Student Loan Interest Rates
Each lender has its own criteria for determining eligibility and rates, such as credit history, total monthly debt payments, and income. Those who are in good financial standing, demonstrate a strong earnings trajectory, have good credit scores, and have shown they are responsible with debts and monthly budgeting are more likely to be approved and receive a good rate. Some private lenders, such as Laurel Road, can provide lower rates to borrowers with excellent credit than they may find through Federal loans. They also offer support in the form of forbearance should the need arise from a change in your financial situation. As a borrower, you want to balance lower rates with loan terms and monthly payments you are comfortable with.
Please note: If you refinance from Federal to private loans, you will lose access to some Federal plans, including Public Service Loan Forgiveness and Income-Driven Repayment (IDR) options.
How LR’s student loan refinancing rates compare
If you are eligible to refinance with Laurel Road, we offer several options based around your individual financial situation. A borrower working with by Laurel Road has no student loan refinance balance limits that they may apply for—we will refinance any loan total up to the amount of student loan debt you currently hold. We also offer flexible loan terms to suit your repayment needs, and we can help borrowers refinance their parents’ Parent Plus loans into their own name, if desired. If you wish to pay off your loan quickly, or stretch it out over a longer amount of time—we can help.