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.
- Private student loan interest rates
- How are private loan rates determined?
- How to calculate your total interest
- Paying off student loan interest
Private student loan interest rates
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.
How are private student loan interest rates determined?
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.
Fixed rates vs. variable rates
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.
How to get a lower interest rate on a new private student loan
Here are some tips to increase your chances of getting a lower rate on a private student loan.
- Improve your credit. A good credit score is the key to a lower interest rate. To get one, pay your bills on time, repay debt, and only apply for new credit when you absolutely need to.
- Apply with a cosigner. If you have fair or bad credit, a cosigner can make it easier for you to get approved for a student loan with a low rate. Just make sure you make all your payments; otherwise, the cosigner will be responsible for them.
- Choose a shorter repayment term. Most lenders offer lower rates for shorter repayment terms. That’s why it’s a good idea to pick the shortest term you can afford.
- Sign up for autopay. Some lenders offer autopay discounts for enrolling in autopay. Most autopay discounts lower your rate by 0.25 percentage points. This might not seem like a lot, but every little bit counts.
- Shop around. Not all private student loan lenders are created equal. Shop around and compare all your options to find the offer with the lowest rate.
- Make on-time payments. Once you’ve made a certain number of on-time payments, some lenders will reward you with an interest rate discount. Check with your lender to find out if this is an option.
How to calculate your total interest
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.
Paying off student loan interest
If you’re hoping to pay less interest on your student loans, consider these student loan payoff strategies.
- Pay more than the minimum payment. The easiest way to lower your interest charges is to pay more than the minimum amount you owe every month. You might have to pick up a side hustle or cut some expenses to do so.
- Refinance. When you refinance, you consolidate your student loans into one loan by taking out a new one with a private lender. Ideally, you’d lock in a lower interest rate than the ones you currently have.
- Make bi-weekly payments. Instead of making one payment every month, cut your bill in half and pay that amount every two weeks. This way, you’ll add one extra payment each year. The extra payment stems from the fact that different months vary in their number of days (Think: February.), so some of these second payments each month will build ‘rollovers’ into the next months.
- Use your tax refund. If you get a tax refund, consider using some or all of it to pay off your student loans. While it may be tempting to go on vacation instead, putting the extra funds toward student loans can save you money in the long run.