What’s The Importance of the Average Interest Rate for Student Loans?

What is a good interest rate on student loans? You might be asking yourself this question in anticipation of a loan that you are about to take for your education. Maybe you’re asking as a parent who has been asked to cosign a loan. Or maybe you have already taken out a loan, and the debt is weighing you down. Whatever the situation, the interest rate on college loans is important and being enlightened early enough could save you a ton of cash in the future. Interest directly affects the lifespan of a loan and how much you end up paying, including the principle if you renegotiate the loan… Many students, especially those seeking private finance for their education rush into deals sugar-coated with goodies and forget the most important part of loan negotiation, which is the interest.

Understanding the average rate of student loans will help you make informed decisions in the future and will save you a lifetime of cash and heartache.

Current Interest Rate on Student Loans Affects Your Future Loan Payments

There are two types of educations loans: federal loans and private loans. These carry different interest rates, and each is further divided into smaller categories with different applicable rates. Loans may also carry variable or fixed interest. Variable interest changes over the life of the loan depending on the remaining interest while fixed interest remains constant over the loan term. Federal loans are generally fixed interest loans, while interest rates for private loans are generally variable.

Federal loans may either be:

  • Perkins Loans: These are awarded based on financial need and generally carry the low interest rate of 4.45%.
  • Stafford Loans: These carry an interest of 4.45% for undergraduate loans and 6% for graduates. They may also be subsidized or unsubsidized. The former is need-based and means that the government caters to any accruals in the case of default or otherwise. Stafford loans interest rate history is varied. Loans issued before July 1, 1998, were adjusted to a rate of 3.28%, while those issued between July 1, 1998, and June 30, 2006, were adjusted to 2.48%. 2013 brought the rate up to 6.8% for new loans, and although the interest rate remains fixed for the life of the loan, the rate may be reviewed for new loans in later years.
  • Plus Loans: These generally have higher interest rates than other federal loans, getting to 7%.

Normal interest rate on student loans depends on the package you are applying for, whether federal or private, and these vary too. Federal loans carry fixed interest, and therefore the amount that one pays will always be reducing, unlike private loans where unpaid interest may accrue and be added upon the principal, translating to higher amounts. A rate cap of 8.25% is also set for these loans, meaning no unscrupulous lenders can take advantage of students who are desperate for a loan. The typical interest rate on student loans for federal loans is 4.45%, and you should keep this in mind when applying for student loans because some private lenders can take it all the way up to 15%.

Variable interest rates are primarily ties to other external rate factors such as the LIBOR (London Interbank Offered Rate) and the Treasury’s 10 year bond yields.

Be wary of lenders who seek to take advantage of your ignorance. Some variable interest products may typically start out with lower interest rates than those of federal products, but these are sure to rise over the life of the loan.

It’s quite clear that the average interest on college loans differs, from federal to private loans. When you start making payments on your loans, most of the payment usually just goes towards clearing your interest, leaving the principal untouched. The best way to handle high principals and even higher interests is to always make timely payments, and if possible, pay more than you should each month.

 How Is The Average Interest Rate Of Student Loans Arrived At?

While the government is quite lenient with loan repayments and only starts collecting after you have graduated, private lenders can be brutal. If you are thinking of taking out a private loan, it is crucial that you understand how interest rate on private student loans works. Most private lenders might require a student with a steady credit history or ones with incomes already. If you are in a position to start clearing most of your interest early, do it. Make regular payments and make the interest schedule work for you so that you are left with most of the principal to clear instead of the interest. This is what is referred to as an amortization schedule.

With regards to amortization and interest, you also need to understand what capitalization is. Capitalization happens when interest accrues due to deferred payments, which is then added to the original principle, making what you need to pay higher than the original amount you borrowed. This is why it is important to keep up to date with your payments, and if you anticipate a situation where you will not be able to make those payments, let your lender know in advance so that you can renegotiate your schedule.

To answer your question, what is the average interest rate on student loans; federal packages are fixed for the term of the loan and vary according to the type, while private packages depend on the lender. You also need to understand related party loans interest rate which affects say, spousal or parental liability transfers of your credit. Generally, the best interest rates on school loans lie within federal loans, which are much cheaper and more lenient than their private counterparts.