Post-college life

What Is a Good Interest Rate?

When you take out a student loan, what you ultimately end up repaying is more than you originally borrowed. That’s because of interest charges, which cause your balance to grow over time. The higher the interest rate and longer the repayment term, the more money you’ll spend during your loan repayment.

Understanding typical interest rates for federal and private loans can help you make an informed decision when shopping around for a refinancing lender.

Federal student loan interest rates

Unlike with private loans, federal loan interest rates are determined by the government. They’re the same for everyone, regardless of your income or credit score. Federal loans also have fixed interest rates, meaning the rate stays the same for the duration of your repayment.

The interest rate you have is dependent on the type of federal loan you have and your grade level. For example, if you’re an undergraduate student, your loans would have an interest rate of 5.05 percent. If you’re a graduate student, however, your loans’ interest rates could be as high as 7.6 percent.

Federal student loan interest rates have reached unusual highs, causing loan balances to balloon. For example, if you had $30,000 in student loans and a 7.6 percent interest rate, you’d pay a total of $42,921 under a Standard Repayment Plan, which you’d repay over the course of 10 years. Thanks to interest, you’d have to spend an extra $12,921 to pay off your loans.

Private student loan interest rates

While federal loan interest rates are set by the government, private student loan interest rates vary by lender. The rate you get is dependent on a number of factors, including your credit score, income, length of loan term, whether or not you have a co-signer, and other variables that depend on the lender.

Private loans can have fixed or variable interest rates. Fixed rates stay the same for the length of your loan. Variable rates typically start off very low, but can fluctuate over time.

CommonBond also offers a hybrid-rate loan, the first of its kind in the industry, which stays at a fixed rate for the first five years and then moves to a variable rate for the next five.

Private lenders can have wildly different rates. For example, some lenders have rates as high as 13 percent. However, CommonBond offer variable rates as low as 3.72 percent, so it’s worth doing your homework before choosing a lender.

3 ways to reduce how much you’ll pay in interest

Regardless of what loans you have, there are three ways to reduce how much you’ll pay in interest charges.

1. Opt for a shorter loan term

All federal loans have a Standard Repayment Plan where borrowers repay their loans over the course of 10 years. However, private lenders allow you to choose your own loan term. Some offer terms as short as five years.

Although your payments will be higher on a shorter-term loan, you’ll pay much less in interest overall. For example, if you had $30,000 in student loans and a 7 percent interest rate, you’d pay $41,799 on a 10-year repayment plan. But if you opted for a five-year term, you’d pay just $35,642.

2. Make extra payments

If you can afford to do so, making extra payments will help you pay down the principal more quickly and reduce how much you’ll pay in interest. Even a few dollars extra each month can make a big difference.

For example, pretend you had $30,000 in student loans at 7 percent interest and a monthly payment of about $350. If you upped your payment by just $50 per month, you’d pay off your debt 20 months ahead of schedule. Plus, you’d save over $2,000 in interest.

3. Refinance your student loans

One of the most effective ways to reduce interest charges is to refinance your student loans. When you refinance, you work with a private lender to take out a new loan for the amount of your current loans. This new loan has different repayment terms. You could qualify for a lower interest rate, lower monthly payment, and different loan length.

If you qualify for a lower interest rate, you could save a significant amount of money. For example, if you refinanced your $30,000 in loans with a 7 percent interest rate and qualified for a 4 percent rate, you’d repay a total of just $35,599. By refinancing, you’d get a lower monthly payment and would still save over $6,000.

Tackling your debt

Unfortunately, the interest rate on your student loans can cause your loan balance to grow significantly over time. However, by understanding how interest rates work and the different ways to lower your rate, you can minimize the amount of interest that accrues and pay off your debt faster.

By exploring all of your options, you can save money over the length of your loan and take charge of your debt.

If you’re ready to refinance your loans, you can find out your new rate in just a few seconds.

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