What is a Good Interest Rate for a Student Loan?
Hello, future students and graduates!
Navigating the world of student loans can be a bit overwhelming, and one of the most important things to understand is the interest rate. A low interest rate can save you thousands of dollars over the life of your loan, while a high one can make repayment a real challenge. So, what is a good interest rate for a student loan?
The short answer is: the lowest rate you can qualify for. But to give you a more specific idea, we need to break it down by the type of loan—federal or private—and the current economic climate.
Understanding Federal Student Loan Interest Rates
Federal student loans are often the best place to start.
For the academic year, federal student loan interest rates are as follows:
Undergraduate Direct Subsidized and Unsubsidized Loans: around 6.39%
3 Graduate Direct Unsubsidized Loans: around 7.94%
4 Direct PLUS Loans (for graduate students and parents): around 8.94%
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These rates can be considered the benchmark. A "good" interest rate for a student loan is one that is at or below these federal rates.
The Role of Subsidized vs. Unsubsidized Loans
It's also important to understand the difference between subsidized and unsubsidized loans:
Subsidized Loans: The government pays the interest on these loans while you're in school, during your grace period, and during periods of deferment.
7 This is an incredible benefit, as it means your loan balance won't grow while you're focused on your studies.Unsubsidized Loans: You are responsible for paying the interest on these loans at all times. If you don't pay the interest while in school, it will be added to your loan's principal balance, a process known as capitalization.
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What About Private Student Loans?
Private student loans are offered by banks, credit unions, and other lenders. Their interest rates are not set by the government and can be either fixed or variable. A variable interest rate can change over time based on market conditions, which means your monthly payment could go up or down.
Fixed rates for private student loans can start as low as 2.95% for borrowers with excellent credit and a co-signer, but they can go as high as 17.99% or more.
11 Variable rates also have a wide range, often starting a bit lower than fixed rates but carrying the risk of increasing over time.
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So, What Is a "Good" Rate?
For Federal Loans: Any rate at or below the current federal rates is considered good. These loans also come with unique protections and repayment plans that private loans don't offer.
13 For Private Loans: A good private student loan rate is typically one that is lower than the federal rate for the same type of loan. If you have a strong credit history (or a co-signer with one), you might be able to find a private loan with a lower rate than your federal options, especially a fixed rate.
14 A rate below 6% for an undergraduate loan or below 7% for a graduate loan is often considered very competitive.15
A Quick Note on Refinancing
If you've already graduated and have student loans, you can consider refinancing. Student loan refinancing is the process of getting a new private loan to pay off your existing ones. The goal is to get a lower interest rate, which can save you a lot of money.
Conclusion: Your Best Strategy
The best strategy is always to start with federal student loans. Complete your FAFSA® form to see what you qualify for. If you need additional funds, then compare private student loan rates. Always prioritize a fixed interest rate for predictability and only consider a variable rate if you have a plan to pay off the loan quickly.