Tag Archive for: Direct Loans

For undergraduates and graduates considering student loans to help pay for their education, finding a low interest rate loan is important. Understanding how rates are set and how they potentially change over time can help you decide which loan is best for you. Let’s take a closer look at what determines the interest rate on various types of loans.

Direct Loans

The largest student loan program in the United States is the Direct Loan Program and is offered directly through the federal government. The formulas for setting interest rates for the Direct Loan Program are determined by Congress. Currently, the interest rate is set as a fixed rate for all loans first disbursed on or after July 1 and by June 30 of the following year. So, any loan first disbursed during that one-year window will have the same interest rate for the life of that loan.

The interest rate is the index plus an add-on or margin. In the case of federal loans, the financial index used is the 10-year Treasury note auctioned at the final auction held prior to June 1. That index is then used for new loans first disbursed in that following July 1 – June 30 timeframe.

The following chart represents the interest rate calculations for federal Direct Loans first disbursed on or after July 1, 2017 and before July 1, 2018.

Borrower TypeIndex (10-Year Treasury Note)Add-On (margin)Fixed Interest Rate
Direct Subsidized LoansUndergraduate Students2.40%2.05%4.45%
Direct Unsubsidized LoansUndergraduate Students2.40%2.05%4.45%
Direct Unsubsidized LoansGraduate/Professional Students2.40%3.60%6.00%
Direct PLUSGraduate/Professional Students and Parents of Dependent Undergraduate Students2.40%4.60%7.00%

Private Loans

For private student loans, the interest rates will still be based off of a financial index (although the exact index may vary by lender) plus a margin. However, other factors will also go into determining the interest rate on private student loans. The borrower’s credit score (or cosigner’s credit score) is a determining factor in the interest rate assigned to a private student loan. A high credit score may translate to a low interest rate. Another factor that can determine the interest rate on a private student loan is the length of the repayment term. Typically, a longer repayment term means paying a higher interest rate.

Fixed Interest Rates

Private student loan lenders will usually set their fixed interest rates prior to July 1 for the upcoming school year. That fixed rate will remain constant for the life of the loan. Lenders may adjust their fixed interest rates each year for new loans or even during the year if there is a dramatic change in market conditions.

However, once you’ve received your loan, your fixed interest rate for that specific loan will remain the same until the loan is paid in full. Your monthly payment will also remain constant for the duration of your repayment term.

Variable Interest Rates

When private student loan lenders set their variable interest rates, they may use a different financial index. Some lenders will use the 1-month LIBOR (London Interbank Offered Rate) where the variable interest rate will fluctuate monthly based on changes (up or down) in the 1-month LIBOR. Other lenders may use the 3-month LIBOR and adjust their variable interest rates quarterly (every three months).

Finally, other lenders may use the Prime Rate as their index and adjust their variable rates monthly. The bottom line is that your variable interest rate will likely change each month or quarter and your monthly payment will also go up or down based on your rate increasing or decreasing.

So, is any particular type of index better than another when evaluating interest rates from different lenders? You really need to know what the index rate is as well as the margin being added. For example, if you see an offer for an interest rate of “Prime + 1.5%” that might sound pretty good compared to an interest rate of “1-month LIBOR + 4.50%.”

Visually, it just looks like the first rate would be lower. However, if the Prime Rate is 4% and the 1-month LIBOR rate is 1%, both rates would equal 5.50%. It’s always a good idea to look for a lender’s Application and Solicitation Disclosure to see the true interest rate calculations.

For more information on student loan options and other helpful resources, please visit U-fi.com.

Financial aid is awarded in many forms, and as a student, it is important to know all of your options before deciding which awards to accept. You’ll want to compare the aid and calculate the remaining costs of all the schools you are considering. Eligible students may receive an award letter or a financial aid package.

The Financial Aid Process

Submitting your Free Application for Federal Student Aid (FAFSA) is an important first step to ensure your financial aid eligibility is considered. Your program must first accept you for admission, you must complete your FAFSA, and submit any other information your school requires. To be in the best position, complete all steps on or before each school’s published deadlines. When schools receive your FAFSA information, they calculate your family’s Estimated Financial Contribution (EFC). Your family’s actual financial contribution and the composition of your award letter may differ among schools. Your EFC is deducted from the total Cost of Attendance (COA) to determine your financial need. If you are eligible for financial aid, your award letter will contain all of the aid programs you are eligible to receive, the steps you need to take, and the deadlines for responding to the award letter.

Note: Although you will see your EFC on the Student Aid Report you received after filing the FAFSA, it is probably not the amount you and your family will actually pay for college. For more information, review the article I Submitted My FAFSA – Is the Expected Family Contribution What I Have to Pay for College? When you review your award letter, read all information, understand each program, and know your obligations to ensure you receive the funds. You will need to select the awards you would like to accept and respond to your award letter by the date indicated.

Types of Financial Aid

There are several different types of financial aid including grants, scholarships, federal work-study, and loans. The terms of each type of aid vary, so it is important to understand the differences.

Grants are typically based on financial need and do not need to be repaid. They may include funds from federal, state, and institutional sources. Programs apply grants to your college bill.

Scholarships are based on academics or other performance criteria, financial need, or a combination of both and do not have to be repaid. Scholarships usually come from institutional or private sources who apply funds to your college bill.

Federal work-study may be listed on your award letter, but in order to receive the funds, you must obtain a qualifying job and work to earn this type of financial aid from federal and institutional sources. Your financial aid office will post eligible jobs that are open to qualifying students. Once you secure a job, you’ll receive paychecks throughout the year for your hours worked. Work study does not apply funds to your college bill.

Loans are funds you borrow now and pay back with interest after you finish or leave school. They may come from federal, institutional, or private sources. For most loans, you will be required to take additional steps to secure the funds. If you receive a loan, it is applied to your bill. Many loans also charge fees, which are deducted from your loan amount. Be sure to read all of the loan terms before you borrow.

Determining the Amount You Owe After Financial Aid

Remember, colleges bill you for some costs prior to the start of each semester. The bill typically includes tuition and fees plus room and board charges if you live on campus. You will also have additional expenses such as books, transportation, and personal expenses that will not be included in your bill. Schools factor in all of this criteria when determining your overall cost of education. Your award letter outlines the total for each type of expense.

To determine the amount you will pay at each school, first deduct your grants and scholarships, then loans (minus fees) from your estimated college bill. Your school evenly divides and credits most aid to each semester’s bill.

You will also need to consider the cost of books and supplies at the beginning each semester, and any personal and transportation expenses you may have throughout each semester. If you have financial aid left after your school applies funds to your bill, you can use it to help with these expenses. Obtaining a work-study job can also help with personal expenses. As a general rule, it’s best to have additional funds set aside to help with personal expenses as well.

To continue to receive aid, you will need to make satisfactory academic progress toward your degree. Scholarships may require that you achieve a certain grade point average or meet other performance criteria. Programs also include renewal information with your award letter.

Additional Funds to Help Cover College Costs

In addition to the financial aid listed above, there are alternate sources that can help cover the cost of college.

Private Scholarships

There are a number of private scholarships available, which you can search for with Peterson’s College Scholarship Search. Your guidance counselor can also be a great resource for private scholarship information. Private scholarships can help offset the amount you need to borrow.

Direct PLUS Loans

These are federal loans that some schools may include in an award letter. Direct PLUS Loans are subject to certain eligibility requirements. Typically graduate or professional degree students or parents of a dependent undergraduate student are eligible to receive these loans.

Private Loans

As an alternative, private loans can also assist with covering college expenses. Private student loans, sometimes known as alternative loans, are made by private lenders such as banks, credit unions, and financial institutions. Private student loans are based on credit and are most often used to fill the gap between the cost of attending college and family savings, grants, scholarships, and federal student loans.

Paying for school can feel like an overwhelming process. It’s crucial to meet all of your deadlines to be considered for eligibility. Mapping out your deadlines on a calendar can help keep these details organized. Make sure you consult the available resources and fully understand each step of the process to get the most out of financial aid.