Lower interest rates are making it easier for students to repay college loans.
With rising college tuition costs, relatively low interest rates on college loans help make higher education more affordable for some students. Decreasing interest rates on student loans backed by the government has private lenders competing to keep their rates low as well. Both government and private student loan lenders are looking for ways to help student loan borrowers make their college loan payments on time.
Fixed Interest Rates
Direct Student loans are one of the Federal Student Aid programs available through the Department of Education. These loans offer a fixed interest rate of 6.8 percent for loans first disbursed after July 1, 2006. Subsidized undergraduate student loans offer a few exceptions. Loans first disbursed between July 1, 2008 and June 30, 2009 carry a fixed interest rate of 6 percent. The interest rate for loans disbursed from July 1, 2009 until June 30, 2010 is 5.6 percent. A lower interest rate of 4.5 percent applies for the period July 1, 2010 through June 30, 2011. Direct PLUS loans -- loans made to parents of students -- charge a fixed interest rate of 7.9 percent if disbursed on or after July 1, 2006.
Subsidized Loans Offer Lower Rates
The interest rate on federal Stafford Loans varies depending on whether a loan is subsidized or unsubsidized and covers undergraduate or graduate study. All new Stafford Loans offer fixed interest rates as low as 4.5 percent for undergraduate subsidized loans disbursed during the 2010 to 2011 academic year. The interest rate for subsidized loans disbursed for the 2011 to 2012 school year will be 3.4 percent and 6.8 percent for undergraduate subsidized loans paid out from July 1, 2012 through June 30, 2013. The higher rate of 6.8 percent interest also applies to undergraduate unsubsidized loans, as well as subsidized and unsubsidized graduate loans made through 2013.
Weighted Average Calculation
The interest rate on federal consolidation loans is calculated individually using a weighted average. Loan consolidation combines multiple loans so that you have only one monthly payment. Generally, the interest rate you pay for a consolidated loan averages somewhere between 4.75 and 6.125 percent. In most cases, the interest rate should never be more than the rate you paid on one of the individual loans.
Factors Affecting Private Loan Rates
Interest rates for private student loans can vary widely. For the 2010-2011 academic school year, most private lenders are charging an average interest rate of 12 percent. Most lenders base the interest rate for this type of loan either on the Prime Lending Rate or an average of the LIBOR index. The London Interbank Offered Rate is variable and adjusted quarterly. Loans with interest rates determined by the LIBOR tend to cost less over the long term. Your credit score, how much money you borrow and the length of the repayment period can affect the interest rate you pay on a private student loan.
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