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One of the most common questions we see every year is parents asking, “What is a good interest rate on a student loan?” It all comes down to comparing student loan options and finding out what the best student loans offer.
Unfortunately, too many families don't look into student loans. If you get a single quote, you simply won't know if you're getting a good interest rate on your student loans. You'll need multiple quotes and need to compare options “apples to apples.”
Parents are the most common co-signers on private student loans. Based on your creditworthiness and income, the likelihood of being approved for a private student loan is significantly higher.
Understanding the interest rate on your student loans
The interest rate on your student loan depends on various factors.
First, if you are considering federal student loans (the loans that your college's financial aid office offers based on your FAFSA scores), these loans have a fixed interest rate set each year by the Department of Education.
Federal student loan interest rates are set annually in May for the following period from July 1 to June 30. The interest rate you receive varies depending on the type of loan. Direct student loans have the lowest interest rates, graduate student loans are higher, and PLUS loans (for both parents and students) have the highest interest rates.
Typically, all federal student loan interest rates are “good” for most borrowers.
Private student loan interest rates depend on a variety of factors. Because the student is typically not employed and may not have a credit history, these factors apply primarily to the parent or guardian co-signing the loan (90% of personal loans are co-signing for this reason). Here are the factors that affect your private student loan interest rate:
Interest rates on private student loans currently range from 4% to 18%. It's important to note that each lender also has its own internal metrics – which is why you may receive different interest rates from different lenders. It can really be, “It’s not you, it’s them.”
We generally consider a “good” private student loan interest rate to be one that is close to the same federal loan interest rates.
How to Compare Student Loan Options
The key to finding a “good” student loan interest rate is to simply compare the options. There is no comparison when it comes to federal loans – and you should always take out federal loans before taking out private student loans.
Related: Arrangement of Operations to Fund the College
When it comes to personal loans, you should make sure you get three to five offers when you apply. With so many applications, you may be worried about your credit score, but Experian notes that any additional inquiries for the same type of loan within 30 days will not impact your credit score. This means you have a 30-day “shopping window” to compare loan options.
When comparing, be sure to consider all important factors: interest rate, loan term (loan length), and repayment plan options.
Some loans have more options for repayment after completing your studies – which can be a nice advantage, even if the interest rate is slightly higher.
Ultimately, the most important factor in your monthly student loan payment is the size of the loan. With a 10-year term, student loan interest is only about 21% of your total payments. The rest is simply paying back your capital. So while you want to get the lowest interest rate possible, other factors such as repayment plans may be important.
Where to buy student loans
When it comes to student loans, most people only know the “big names” like Sallie Mae and SoFi. But there are a number of student loan lenders out there, and they all work similarly. Since they all have different funding sources and internal metrics, the loan interest rates they offer may vary.
Here we compare the best private lenders for student loans. You can also find a small sample here:
People ask too
What is the average interest rate on a student loan?
According to the Education Data Initiative, the average student loan interest rate among all student loan borrowers is currently 6.9% APR.
What is the FAFSA Federal Student Loan Interest Rate?
The current interest rate for federal student loans is between 5.5% and 8.05% APR.
Can I lower the interest rate on my student loans?
There are ways to lower the interest rate on your student loans, although options vary depending on the lender. One of the most common ways to lower your interest rate is to sign up for automatic payments.
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