What Factors Affect Student Loan Interest Rates?

The interest rate on your student loan is influenced by a number of factors, ranging from your individual credit profile to ever-changing forces within the global financial markets.

What about personal credit history?

Usually the most profound influence on your student loan interest rates is your individual credit history and financial profile. Fortunately, that also happens to be the easiest interest rate-impacting factor for you to exert personal control over as a borrower. As your credit score and track record becomes stronger, lenders will be more motivated to win your business, and to do so they may offer you lower, more alluring rates and terms.

Of course credit history can also work against you if your finances become unmanageable and you have trouble paying bills on time. That is why it is so vital that you take steps to raise your credit score, earn and save as much money as possible, and pay all of your debts and loan obligations on time. Do those things and your credit should steadily improve.

How do industry changes impact student loan rates?

The rates charged on all consumer loans are tied to underlying interest rates that are set by the government or by the dynamics of supply and demand in the marketplace. If the Federal Reserve Bank, for instance, cuts the rates it charges to lend cash to financial institutions, then through a “trickle-down effect” the price those lenders charge to consumers will typically drop in tandem. If the Fed raises rates, usually consumer rates will eventually go up.

For that reason, these broader financial industry actions can have a significant impact on student loan rates. Tracking the sources and movements of major underlying rates can be complicated, but is not at all necessary in order for you to shop for an affordable student loan, refinance, or consolidation rate. Just compare loan rates from reputable lenders, who will automatically raise or lower their specific rates in order to stay competitive as the financial markets shift through the natural ups and downs of interest rate fluctuations.

How do fixed and variable rates work?

Loans can be either fixed or variable, and if a loan carries a fixed interest rate then that rate will remain the same throughout the entire lifetime of the loan repayment process. If you take out a student loan that charges a fixed rate of 4%, for instance, then that rate will remain intact for as long as you have the loan – as long as you don’t trigger a rate change by violating the terms and conditions of the loan.

With a variable rate, by contrast, the rate may vary. Your interest rate can go up, come down, or remain the same – depending upon prevailing interest rates. The rate may rise if economic conditions send interest rates higher, for example, or it may fall – which would make your loan less expensive – if prevailing conditions send rates lower. Because of the inherent potential of variable rates to change, you should check to see if the loan has caps or limits placed on high the rate can go during any given timeframe. But these kinds of loans can also potentially work in your favor to trigger lower monthly payments. That’s because if interest rates fall you’ll capture more savings – whereas with a fixed rate loan even if rates plummet the rate you pay will remain exactly the same.

Are discount rates available from student loan lenders?

Lenders sometimes also offer discounted interest rates on loans, and they may advertise these using terminology such as “reduced basis points.” Essentially these are marketing incentives offered to borrowers that provide them with especially low, attractive rates on student loans or student loan refinancing and consolidation.  Why would a lender extend that kind of perk to a customer? Typically these incentives are offered to borrowers who agree to have their monthly payments automatically withdrawn from their bank accounts each month.

That ensures that the lender gets paid on time, as long as you keep sufficient funds in your bank account. In exchange for that reassurance, many lenders will agree to give you an interest rate discount. Since the amount of interest you pay has a significant and direct impact upon the size of your monthly payment, these kinds of incentives are yet another factor that can affect your student loan interest rate.
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