Fixed-Rate Student Loans
Federal Fixed-Rate Loans
Usually one of the best options when seeking to take out a student loan is to borrow from the federal government under the William D. Ford Direct Loan Program. There are four loans to choose from:
These loans all offer fixed interest rates throughout the life of your loan. Most of the time, federal loans offer lower interest rates than private student loans. The rates can change year to year; however, the rate is set prior to July 1st each year, and once you are approved for a Direct Loan, your rate is locked in all the way through repayment.
The trick with a federal loan, wherein the U.S. Department of Education is your lender, is that you have to reapply for each year of school you need funding. This means that you will likely have four different loan rates, one for each year of schooling. After you finish or leave school, you can consolidate these loans into a Direct Consolidation Loan, which takes the weighted average interest rate of your loans and combines them into a single new loan with new loan terms and interest rates.
Direct Loan Interest Rates
Current interest rates for loans first disbursed between July 1, 2016 and June 30, 2017 for Direct Loans are:
- Direct Subsidized undergraduate student rate: 3.76%
- Direct Unsubsidized undergraduate student rate: 3.76%
- Direct Unsubsidized professional or graduate student rate: 5.31%
- Direct PLUS graduate, professional or parents of undergraduate rate: 6.31%
With a Direct Subsidized Loan, the government pays your interest while you are in school, while with an Unsubsidized Loan you are responsible for the interest during all periods of your loan. Direct Subsidized and Unsubsidized Loans are not based on a credit check and often don’t require a co-signer. Instead, your Expected Family Contribution (EFC) is calculated to determine how much financial need you have in relation to your total cost of attendance (COA) at your chosen school. Direct PLUS Loans do require a credit check and are offered to graduate or professional students or parents of undergraduate students. To apply for a federal student loan, you must fill out a Free Application for Federal Student Aid (FAFSA).
Private Fixed-Rate Loans
Fixed-rate loans offered through private financial institutions and organizations almost always start out higher than the variable rate loans since student loans generally have a long life, and the lender is trying to estimate profit margins for the duration of the loan term. Interest rates are either based on the PRIME or LIBOR index. The PRIME Lending Rate is the rate banks offer their customers with the highest credit ratings as published by The Wall Street Journal. London Interbank Offered Rate, or LIBOR, is based on the average interest rates of deposited U.S. currency in the London market. Most lenders use one of these as a base rate and then add a percentage, or a spread.
Some banks, credit unions, private and state organizations and foundations, and even schools are offering loans with fixed-rates these days to help fill in the gap between federal funding and the cost of higher education. Some of these offer very low interest rates if you meet certain criteria, such as a required GPA, certain field of study or school, high credit scores, or the use of a co-signer.