You’ve applied for student loans, and now you’re ready to know how much interest you’ll be paying. But where does that number come from? How can you make sure your lender gives you a fair interest rate? We’ll explain everything in this post.
Your credit score
Your credit score is a number between 300 and 850, with higher numbers representing better credit. If your student loan has an interest rate above the average student loan interest rate, it could be because you have a low score. As per the experts at Lantern by SoFi, “You will usually need a strong credit score to acquire an appealing offer.”
A good credit score is based on your history of paying bills on time and borrowing money. A bad credit score can impact everything from getting approved for an apartment to getting a job or even opening a bank account. If you want to improve your chances of getting lower interest rates, pay off any outstanding balances, avoid opening new accounts (especially if they’re with high-cost lenders), and make sure that all debts are at least 60 days past due before paying them off.
Your loan term length
If you want to keep your monthly payments low, your best bet is to take out a longer loan term. The longer the term, the lower your interest rate will be—and it’s usually cheaper to borrow for 20 years instead of 10.
On the other hand, if you can afford higher monthly payments and don’t mind paying more in total interest over time (which is what happens when you take out a shorter loan term), then go ahead and go with something shorter.
The loan type you choose
There are three types of student loans: federal, private and consolidation. Federal loans are those that are issued by the government—the Department of Education has a program called the Federal Direct Loan Program (FDLP) which students can apply for. Private student loans come from banks and other institutions, while consolidation involves taking out multiple unsubsidized or subsidized federal student loans and putting them into one loan with a lower interest rate.
A consolidation is a great option if you have multiple unsubsidized or subsidized federal student loans with varying interest rates because it allows you to combine them into one consolidated loan with a single fixed rate based on your creditworthiness. If your credit score is low enough, you may even qualify for an interest rate as low as 4%.
Whether your interest is subsidized or unsubsidized
The U.S. Department of Education offers two types of student loans: subsidized and unsubsidized. Subsidized loans are awarded to those with financial need and are forgiven after 20 years’ worth (10 if you work in public service).
Unsubsidized loans are available to all students who apply for them and do not require credit checks or cosigners, so anyone can get an unsubsidized one. They are charged interest while you’re in school, making them more expensive than their subsidized counterparts—but they also give borrowers more power over their interest rates, which we’ll discuss later on in this guide!
With so many factors in play, it can be hard to know what your student loan interest rate will be. But if you take the time to understand these variables and plan ahead, you can make sure that the cost of your education doesn’t cost more than it has to.