Calculating Student Loan Interest Rates
By: manybanking.com Staff

Student loans can be used for much more than just tuition. These funds can also be applied to expenses for transportation, housing, food, books, supplies, lab fees and computers. Private student loans are available from a wide variety of sources and interest rates can vary greatly from lender to lender and from borrower to borrower. This is because private student loans, unlike federally backed loans given based on need, are awarded based primarily on your credit history. This means that if you apply for a student loan but are deemed to have poor credit, you will likely be required to have a co-signer on your loan who has good credit. For many students, parents act as co-signers for private loans from local banks, credit unions or other financial institutions.

Calculating Your Interest Rate
When a bank runs a credit check on you (or your co-signer), they are looking for a few things that will help them calculate your potential loan’s interest rate. They are looking at your length of active credit history, record of timely payments, lines of available credit and any history of poor credit activity (i.e. defaults, charge-offs, etc.).

For students, this credit history is typically very limited or non-existent, hence, the need for an additional borrower on the loan. If the co-signer has excellent credit (a FICO score of 720 or above), you can expect an interest rate around the prime rate at the time of loan origination. But since the prime rate is also highly volatile, your interest rate can vary greatly over time. To avoid this, you might opt for a fixed rate student loan instead. Currently, fixed rates are hovering around 7% for private loans for people with top scores. If your credit is less than stellar, you can expect an interest rate around 11-15%. No matter which type of loan or interest rate you are approved for, though, keep in mind that you can deduct education loan interest payments from your taxes each year, which can help reduce the cost of your loan overall.

Getting a Lower Interest Rate
If you don’t mind paying off your loan while you’re still in school, you might be able to secure a much lower interest rate on private student loans. Companies like Sallie Mae (Stock Quote: SLM) offer interest rates at 4.5% for borrowers who wish to start repaying their loans during college. Many online lenders will also reduce your interest rate by as much as 0.25% if you set up an automatic debit payment plan through your checking account. Micro-loan programs are a new option for students who don’t need a lot of money but are looking for a reliable funding source.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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