Know How and When the Student Loan Interest Rate May Change
If you have student loans, one of the keys to paying off your balance sheet is understanding your interest rate and how it works.
Depending on what type of loan you have, your rate can change over time, which means that you may end up owing more and more money. However, there are several ways to prevent this, as we will discuss in detail.
The biggest difference to keep in mind is the difference between federal and private loans.
Federal student loans
Interest rates for federal student loans are set by the government. They are the same for everyone (called standardized), but change annually. Here are the rates if you took a federal loan today, according to StudentAid.gov :
As you can see in the graph, these rates are fixed for the life of your loan, as opposed to private loans.
Private student loans
Individual lenders dictate their own interest rates, which means you will need to look for the most competitive rate from different lenders. You may even find a lower rate than the government is offering. However, it depends on your credit rating and several other factors, and this can vary.
Obviously, when you shop, you want to choose the loan with the lowest annual percentage rate (APR). Discover provides the following example of how much a few percentage points can cost you in the long run:
On a $ 10,000 bachelor loan with a fixed interest rate of 6.49 percent, a 45-month grace period, a 6-month grace period and a 15-year term, your monthly payment could be $ 111.05 and you pay $ 9,989 in interest on top of the loan amount. life expectancy. If the interest rate on the same loan is 12.49%, your monthly payment could be $ 188.53, and you might have to pay $ 23,933 in interest — a difference of $ 13,944.
However, there are other factors to consider: make sure you read and understand all terms and conditions before signing the dotted line.
For example: over the years, borrowers have, in a sense, benefited from low interest rate conditions. But now that the Federal Reserve has been steadily raising rates , your student loan interest balance could also be affected if you have a variable rate. Your rate can change monthly, quarterly, or annually, depending on your lender. You want to understand the terms of your interest rate when shopping.
Rate your fixed rate options
If you have a variable rate loan, one way to prevent further fluctuations is to refinance into a fixed rate loan. To be clear, this may not result in a lower rate than what you currently have, but it will give you peace of mind that your rate will not suddenly double overnight.
Alternatively, “if you paid off the loan on time, you can convince your lender to switch your variable rate loan to a fixed rate loan without refinancing,” says Marketwatch . But this is something that you need to decide with your lender and it is very individual.
Read more about refinancing and loan consolidation here . Bottom line: Become familiar with your current interest rate and whether your loan is fixed or variable, as well as your repayment schedule. This will help you deal effectively with debt.