Planning for a college education seems like a lifelong process as personal loan shopping can be quite time consuming.
Students who shop personal loans to attend college will have some type of interest rate attached to the deal. And for recent graduates, the road to paying off the loan is quite lengthy that often forces them to consider student loan refinancing at some point in the repayment process. So, how are interest rates on student loans determined? Well, the answer to that questions is dependent upon whether or not you have a federal or private student loan.
Why do student personal loan interest rates differ? Often, they're dictated by the current market conditions which could vary from year-to-year. Private lenders set their own interest rates based on the credit history of the student or co-signer of the loan. Usually, this is the borrower's parents. Some of the other contributing factors in obtaining personal installment loans include credit score, job history and annual income. In extreme cases, the stock market and the country's economic condition will have a direct affect on both federal and private student loan interest rates.
How Federal Student Loans Work?
Even though federal student loans are based on annual financial market rates, the loan's interest rate is usually componded on a daily basis. It's determined by a simple formula: the charges from the interest rate are accrued by multiplying the loan balance with the number of days since the last payment was posted. After gaining that number, then multiply it by the agreed interest rate. Thus, you have the interest rate charges for each year of the student loan.
For example, on a $10,000 federal student personal loan, you might receive a 4.45 percent interest rate which usually means that you pay $445 in interest charges on the loan for the year. However, that is not the case as your annual interest rate is divided by 365 days and that number is your daily interest rate on the loan. Under this formula, undergrad students will pay the least, while parents and graduate students will have more interest charges on their loan.
Department of Education Sets The Interest Rates
The Department of Education determines the federal student loan interest rate for each shcool year, which is usually from springtiime until June of the following year. These rates are non-negotiable and that applies to all borrowers regardless of their credit history. Congress will approve the department's recommendations without much debate, but they will pose cap limits on each type of loan offered to ensure interest rates don't get too high for borrowers.
Most federal student loan interest rates are 5 percent for under graduate loans with a cap limit of 8.25 percent, 6.6 percent for graduate loans with a cap limit of 9.5 percent and 7.6 percent for direct PLUS (secured by parents) student loan with a cap limit of 10.50 percent.
Private Lenders Offer Their Own Interest Rates For Student Loans
Most private lending institutions have their own standards and requirements that are available when personal loan shopping for higher education. Researching these policies to get personal loan online will help to determine if your application is a good investment for a private lending institution. Usually, a lender will request an educational attainment letter on the applicant's field of study before considering them for a loan.
Unlike federal student loans, private lenders use their own formula to determine the interest rate for each potential borrower. It's imperative that the borrower and co-signer of the loan have impeccable credit. Typically, the better the credit score, the lower the interest rate on the student loan. The biggest cause for this is each party has demonstrated the capacity to repay their debts over time. This makes them a low risk option on the lender's scale.
Interest rates change on a regular basis, thus it's important to track them and knowing whether they're going up or down. You have multiple options available to borrow money for college at very competitive interest rates. Ask yourself which loan offers the least amount of financial risk moving forward after graduation.