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How Interest Rates Affect Student Loans (and How You Can Use Them Wisely)

Student Loans | By Ron Hancock

How Interest Rates Affect Student Loans (and How You Can Use Them Wisely)

According to a 2017 report by nonpartisan, nonprofit think tank New America referenced by NerdWallet, the average student loan interest rate was 5.8 percent among households with student debt. With about 90 percent of all student debt being federal student debt, the interest rate reflects a skew toward federal student loan rates rather than private student loan rates.

What does that mean in dollars? With $30,000 in student loan debt, a borrower would pay about $9,600 in interest if they repaid over 10 years at 5.8 percent. It’s clear that watching interest rates – and understanding what determines them – can mean the difference between hundreds, if not thousands, of dollars you save or spend over the next years or decades of your life. Our calculator makes it easy to see the impact.

Both federal and private student loan interest rates are affected by trends in the economy and stock market, but they’re impacted in different ways.

Federal Student Loan Interest Rates

Federal law is what sets federal student loan interest rates each school year – and the rates for each federal loan type apply to all students who receive it, regardless of their credit history. Congress sets federal loan rates, based on 10-year Treasury notes, plus a fixed increase depending on the type of federal loan. Federal law sets rates that allow undergraduates to pay the least to borrow, while parents and grad students – presumably with higher incomes or later earning potential – will pay a higher interest rate to borrow for education. See Federal Student Aid’s web page for more information.

Private Student Loan Interest Rates

Private lenders set their interest rates based on things such as the credit score, income, job history, and other factors that make up the creditworthiness of each individual applicant. Similar to the way federal student loan rates are tied to the 10-year Treasury bond rate, private student loan lenders typically set rates according to the London Interbank Offered Rate (LIBOR) or the prime rate – which are rates that reflect larger market prices and economic conditions.

Historically Low Student Loan Refinance Rates

Due to another late-year Federal Reserve cut to interest rates, lenders have reduced student loan refinance rates to a near historic low, as noted in Forbes on October 22, 2019. The one universal truth about refinancing student loans is that you should never do it if your interest rate will go up. That still holds true, so if your credit score has recently plummeted and your current interest rates are already pretty good, then today’s attractive refinance rates may not be enough to overcome your bad credit.

The attractive interest rates do mean that it’s a perfect time to check what your current interest rate is, and then see how much U-fi might be able to save you (in as little as two minutes). You should always consider your situation and what sorts of borrower protections you may need. For example, if your income or job isn’t stable and you may need the flexibility of income-driven repayment plans, then at least consider leaving your federal student loans out of a refinance loan so you don’t lose those borrower benefits. You may want to consult our When to and When Not to Refinance Student Loans blog post again.

Take Control of Your Repayment Strategy with Refinancing

If it makes sense for you, refinancing your student loans at a lower interest rate offers you the opportunity to take control of your repayment strategy. Choose lower monthly payments and use your money for what matters most to you. Or, keep the same monthly payment you have now, but be debt-free sooner by taking advantage of today’s lower refinance rates.

In any case, looking at your options, deciding what your goal is, and making a change to help you accomplish your goal is a proactive way to manage your finances and a liberating feeling. Student loans may be a major obligation, but when you take control of how you repay them, it can be very empowering. And, when you have the chance to put positive market conditions to work for you and ease some financial pressure, go-getters like you will enjoy grabbing the opportunity.

Exercising your freedom by shopping rates? Great! Just make sure there are no origination or early repayment fees – and that that you’ll have borrower protections you need, flexible repayment options, and a great customer experience. In short, we think U-fi is the way to go for student loan refinance (we’re just a little biased).

One thing you can count on? U-fi is always here with resources to help you be a smart financial consumer. Explore smart student loan refinance options with U-fi and get started today.

Ron Hancock

Written By:

Ron Hancock is the Regional Director for U‑fi Student Loans and is an expert in many aspects of financial aid, student loans, and debt management. A graduate of the University of Oklahoma, Ron has worked in a number of areas of higher education finance, including positions in a college financial aid office, training and development for a state agency, and most recently as National Manager for Nelnet’s Partner Solutions team. Ron has spoken at numerous financial aid conferences all across the United States.

View all posts by Ron Hancock