A discussion of student loan interest rate is not always all encompassing. Interest rates for this type of loan are computed differently, depending on the origin of the loan and several other factors.
The origin of student loans – whether federally-sourced or privately-sourced – represents two major distinctions. Federally-sourced loans are provided by the federal government of the United States through the Department of Education, while privately-sourced loans originate from private lenders, like banks and other financial lending companies.
Funds provided by the federal government represent the biggest of source of funds for a student financial aid, with a value of more than $150 billion a year. These funds are intended to ensure that all eligible post-secondary students across the United States benefit from federal financial assistance. These funds can cover the cost of tuition, miscellaneous fees, books and school supplies, transportation, room and board, and other related college expenses.
Financial Aid Eligibility Requirements
Loans from these funds are granted on the basis of financial need, not on creditworthiness. You can avail of them if you have the following qualifications:
• U.S. citizen or permanent U.S. resident
• Valid Social Security Number
• Registered with Selective Service, if you’re between the ages of 18 to 25
• Qualified to obtain and maintain satisfactory progress in post-secondary school
Your eligibility will be determined by filling up and submitting the FAFSA (Free Application for Federal the Student Aid). Specialists will review your application and will determine if you qualify for a grant, scholarship, work-study program, or low-interest loan. Most grants, scholarships, and work-study programs are awarded to the neediest, primarily based on income and low family contribution.
Low Interest Loans are Available through the Following Programs:
- Federal Perkins
Interest rate for this type of loan is 5%. The loanable amount is up to $5,500 annually for undergraduates and $8,000 for graduate and professional students. This loan is payable within a period of up to 10 years, depending on the amount of loan. Loan beneficiaries must demonstrate a financial need. - William D. Ford, Direct Stafford Loans, and Direct Subsidized Stafford Loans
Subsidized interest rates are between 3.4% and 6.8%. Loan interest for graduate students is set at standard 6.8%. The U.S. Department of Education is the lender and pays interest on the loan while you are in school at least half-time and during grace and deferment period. Repayment period is between 10 to 25 years, decided according to loan amount and repayment plan selected. Loan beneficiaries must similarly demonstrate a financial need. - Direct Unsubsidized Stafford Loans. Interest rate is 6.8%
Loanable amount is between $5,500 and $20,500, minus any amount of subsidy received during the period. No need to demonstrate a financial need. - Direct PLUS Loans. Interest rate is 7.9%
This type of federal loan is for graduate students enrolled at least half time and parents of dependent undergraduate students to help the cost of their child’s college education. Loan is unsubsidized, therefore borrower is responsible for all interest charges. Proof of financial need is not required, but a borrower must not have adverse credit history.
More Benefits
The amount and type of financial aid provided by the federal government through the U.S. Department of Education is not always based on the financial need. If you apply for assistance, you may be surprised by the amount of educational aid you receive and the generous terms that go with it. You are encouraged to apply for federal financial aid and exhaust all the resources made available to you before considering privately funded sources.
On the top of fixed interest rates provided by federal-funded student loans, which is a major advantage in itself, there are other benefits of obtaining your student loan from the government:
- Free insurance, which cancels your loan obligation if you’re disabled or killed.
- Deferment payment option in case of prolonged unemployment or economic hardship.
- Income-based repayment for graduates with low-income jobs.
- “Debt forgiveness” possibilities for graduates entering the military, joining volunteer organizations, teachers of elementary and secondary schools in low-income communities, accepting assignments in community-based medical or public defense offices and facilities.
It’s not altogether a bad idea to consider private student lenders if the financial aid you acquired from the government is not sufficient for your school requirements. Banks and lending companies catering to student loans provide an unlimited resource of additional funds for you if you need more for your school needs.
But you need to exercise extreme prudence and good sense before availing of this facility, although it’s no longer as easy as before to apply for private student loan. Unlike before, you’re now required by banks to request your school to certify your request for additional funds. If you have this certification, you’ll be classified as a “certified student loan” applicant.
The bank will, likewise, request for a cosigner to speed up the approval process. In general, your loan application is likely to be approved if you’re a “certified loan” applicant with a cosigner with a good credit rating.
Fixed Rates
If you must take out a student loan from a private lending company, you can start by sourcing for possible loans from banks with fixed-rate offerings. There are just a few of them, including Wells Fargo, U.S. Bank, and Charter One.
| Bank | Fixed Rate | Variable Rate |
 |
7.75% to 16.25% | 3.5% to 11.99% |
 |
6.61% to 11.76% | 2.94% to 9.49% |
 |
7.99% | 3.45% to 10.95% |
The disparity of the interest rates between federal student loans and private student loans is quite obvious in the above examples. Unless you have an excellent credit history, and you are willing to risk on a variable rate with no borrower protection, the interest rates for privately-sourced loans are generally higher than federally-funded loans. Even if you assume that interest rates between federal and private loans are the same, you’re ahead with federal loans, considering their other benefits.
You will also note from the above examples that interest rates on variable private loans are lower than fixed rates. Given a choice between the two, your choice may be the variable interest rates because they’re lower than the fixed rate.
But if it takes longer than you expected to pay off your student loan, you may end up struggling and paying much more than you imagined. Isn’t it better to know how much you’re actually going to pay during the duration of your loan than being in the dark if you choose the variable interest rate?
The above sample banks were chosen randomly. You can, of course, check with the other banks to see for yourself.
Benefits of Private Loan
The objective of this article is not to undermine the important role of private student loan providers in helping finance the education of the American youth. After all, they provide the necessary lifeline between students and schools when government resources are exhausted.
They also provide the following other benefits:
- Added resource to help meet your complete school needs
- Supplement federal student assistance if not sufficient
- Credit resource to pay for other school needs, like laptop computers and books
Private student loan providers are even more creative than the government in terms of fulfilling the actual requirements of students, and are even more flexible in providing solutions to problems on the ground. If students need loans to study abroad, for example, private student loan funders are more open to their needs and are ready to provide the necessary resources for them.
As profit-oriented businesses, banks and other financial companies providing student loans could be greedy as well, giving more loans than necessary in the hope of making more profits from their student loan transactions. Some of them have actually been caught conspiring with equally unscrupulous school officials to corner more student loan accounts than the others.
Interest rates, the bank’s proverbial milking cow, are known to have been rigged to the detriment of student borrowers. Student borrowers have been squeezed too much and too early in their young careers with unreasonable rates. Loan principals have been bloated to more than double their original value because of variable interest rates that only bank officials know how to compute.
Reforms
For reforms to take shape, you need to know where you stand in the scheme of things. When you approach a bank for possible student loan assistance, a bank official will attend to your query as a bank customer, not as a student desperate for cash to pay for your school needs. Although that may be true, the fact is the bank needs your business, too.
Aside from asking only what they need as requirements for loan application, you need to inquire about their interest rates and the options available to you in terms fixed or variable rates. Ask them about possible term extension and deferment. If they don’t have any, let it come from them. Don’t make any commitment about coming back. Let the bank know that you’ll check with the other banks.
You’ll be surprised at the concessions the bank officer may try to offer you to get your business, including possible interest reduction.
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