What determines the interest rates on your student loan?
When you take out a student loan the interest rate that you are charged is going to have a huge impact on what it costs you to pay it back. Therefore you are going to want to make sure that you are getting the best possible rate. This requires that you know what the factors that determine that rate. Most people really have no idea and as a result end up paying more than they have to. By taking the time to learn how interest rates are determined you will be able to take the steps that will ensure that you get the lowest possible rate.
The biggest factor when it comes determining the interest rate on your student loan is who you get the loan from. There are several programs offered by the government that will have interest rates that are much lower than those that are offered by private banks. Obviously these are the loans that you should look into first. Not only do they have the lowest interest rates but they also tend to be the easiest ones to qualify for. Unfortunately these programs have a cap on the amount that you can borrow so you probably won't be able to fund your entire education with these.
The other place where you are going to have to look for your student loans is from private banks and even here there are different programs that offer different interest rates. The difference is whether or not you have loan that is subsidized by the government or not. In order to ensure that students have access to the money that they need for college at a reasonable rate the government will provide the bank with an incentive to provide these loans. Not everybody will qualify for them and there is a cap on how much you can borrow so you may have to take an unsubsidized loan as well. The interest rate on a subsidized loan is much lower than that on one that is not subsidized.
One other thing to consider when you are looking at subsidized and unsubsidized loans is that with subsidized loans the interest does not start to accrue until after you have graduated. This is an important factor since it will save you a considerable amount on interest. Since neither type of loan requires that start making payments until after you graduate the interest can really add up fast since you are paying it on the full value of the loan. This is another reason that you really want to get a subsidized student loan.
The terms of the loan that you take will also have an effect on the interest rate that you pay. Some loans offer a fixed rate while others come with a variable rate. Everything being equal you will normally get a better interest rate if you go with the variable option. In practice however things are rarely equal since most of the government loan programs and the subsidized loans have fixed interest rates. You do have to be careful if you choose to go with variable interest rates since they can go up dramatically which will greatly increase your monthly payment.
One of the biggest factors that affects student loan interest rates is the Federal Reserve's prime lending rate. This is the rate that the Federal Reserve charges when they lend money to banks. More importantly it tells the banks what kind of policy the Fed is trying to implement and what interest rates they should be charging their customers. In general when the economy is strong interest rates will go up to reduce the risk of inflation, if the economy is weak they will go down to stimulate growth. Changes in the prime lending rate will have the biggest impact if you have a student loan with a variable interest rate, this is what causes the changes in the rate that you are being charged.
In theory your credit history is also an important factor in the interest rate that you are charged on a student loan, in practice however it has little impact. The reason for this is that most students have a credit histories that are very limited so there really isn't much of a difference between them. Therefore there is little difference in the rates that usually get charged. In addition the government programs don't even consider your credit as a factor since the rates are the same for everybody.