When it comes to student loans, as with any loans, interest rates are an extremely important factor for the borrower to take into consideration. Student loan interest rates are not all created equal. Federal student loan interest rates differ from private student loan interest rates, and private student loan interest rates can become better or worse depending on the borrower’s credit. There are both advantages and disadvantages to each type of student loan, however it is generally accepted that a fixed rate loan is a borrowers best option.
Fixed Interest Rate
The advantage to having a fixed interest rate loan is that the borrowers monthly student loan payments will never fluctuate, which makes it easy to calculate the exact length of time it will take to pay back the loans principal and interest. However, the possible disadvantage to a fixed rate loan is that the borrower may end up having a higher monthly payment. Fixed rates are typically only available with federal student loans, which is one reason why it is recommended that students apply for these types of student loans first.
Variable Interest Rate
With a variable interest rate the loans interest rate may fluctuate over time. All private student loans will likely offer a variable interest rate, meaning that the interest rate on a borrowers private student loan could rise and fall over the lifetime of the loan. For students who will need to utilize private student loans to help pay for college, you will want to make certain that you (or your cosigner) have a great credit profile, as this will help to get you a better interest rate on the loan. The possible advantage to a variable interest rate student loan, is that the borrowers interest rate could go down, if the underlying interest rate index goes down. The obvious disadvantage to a variable rate student loan is that the borrowers interest rate could go up (increasing monthly student loan payments) and the borrowers monthly loan payments will fluctuate since variable interest rates are adjusted on a monthly, semi-annually, or annually schedule.
Individuals in need of student loans for college should start by applying for FAFSA. The Federal Stafford Loan, Parent PLUS Loan, and Graduate PLUS Loan all come with low, fixed interest rates, which is why these federal student loans should be applied for first, before applying for private student loans.