Whether you are currently paying back student loans or about to take out student loans for yourself or your child, it is a good idea to learn more about the different types of loans and current interest rates so you can minimize the total amount you’ll pay over the life of the loan. For those who are currently paying off old loans, by refinancing to a lower interest rate, you can save a lot of money.
Current Interest Rates For Student Loans
What type of interest rate you can obtain for your student loan depends on several factors:
- Is this a new loan or an old one?
- If it’s a new loan, are government loans a good option?
- If you take out a federal loan, will you need to pay the accruing interest?
- If it’s an older loan, what is the rate you are currently paying, and how does it compare to current rates?
What options are available for students?
The interest rate for a federal student loan for undergraduates is currently 3.73%. For loans taken out by parents, however, the rates are much higher – 6.28%. The rates are also higher for graduate students. Perhaps surprisingly, private loans might offer lower interest rates if the person taking out credit has an excellent credit score. For parents looking to help finance their child’s education, therefore, it might make sense for the loan to be in the parent’s name if his or her credit score is high enough.
For undergraduates who qualify for subsidized student loans, this is likely to be the best option as the government will cover the cost of interest while the recipient is in school.
What are the differences in student loan types?
There are two types of loans available – federal and private. There are some key differences between the two:
- For federal loans, the interest rates are set based on the 10-year Treasury rates. For private loans, interest rates vary depending on the borrower’s credit score
- Federal loans typically charge a fee, while private loans do not.
- While federal loans come with fixed fees, private loans can have either fixed or variable interest rates, where variable rates can change as often as every month.
What are the rates to refinance an existing student loan?
According to Lantern by SoFi, the rates available if you want to refinance a student loan range from 3.575% APR up to 5.1% APR depending on how long you want to pay off the loan. If you can pay it off in 5 years by making a larger monthly payment, then you will pay a lower interest rate.
Should you refinance your current student loans?
Depending on when you took out your student loans and your credit rating, it might make sense to refinance them. Also, if you suspect interest rates are going to rise, it’s good to lock down a competitive rate now rather than waiting. Shopping around for the best rate possible makes sense, particularly with easy-to-use sites such as Lantern by SoFi. If you can switch an existing loan to one with a more competitive interest rate, you will save money over the long term.
There are some benefits that come with federal loans that you cannot get with a private loan. These include forgiveness of student loans in certain circumstances and income-driven options.
So, does it make sense to take out private vs. federal loans, and does it make sense to refinance existing loans? Given how low private rates are, it might make a lot of sense to consider private options. But everyone’s circumstances are different, so you must carefully consider your own situation.