A lot of things keep us up at night. Finances. Dealing with family during the holidays. Finances. An awkward interaction with a coworker. Finances. An argument with a partner. Finances.
You get it.
Specifically, student loan interest rates could be causing your finance-related insomnia. But what is a high student loan interest rate, and how can you tell if yours is too high? To learn this, it’s important to understand the factors that influence interest rates in the first place.
What Are Interest Rates?
Without interest, lenders have no way of making a profit off of what you borrow. In their minds, everyone wins: you get the money you need, they eventually get their money back. And the interest yields earnings for the lender.
Interest rates can vary drastically depending on the type of loan, the lender, the amount you borrow, and often your credit history or financial profile.
Are Your Interest Rates Fixed or Variable?
Fixed interest rates are interest rates that don’t change over the life of the loan. Variable interest rates fluctuate based on market indexes . This means that the interest payment you pay one month might not be what you pay the next month. Sometimes, variable interest rates start out lower than their fixed interest rate counterparts.
The choice you make for your loan might depend on a number of factors. If you’re the type to feel more comfortable knowing you’re paying the same rate no matter what, a fixed interest rate might be the better option for you. If you’re willing to take a risk, a variable interest rate could be the way to go. But again, it’s a risk: your rate could increase based on how the market is doing.
You may want to check your loan terms to see which type of rate you have. If you have more than one student loan, make sure to review them all.
Federal vs Private Student Loan Interest Rates
Federal student loans come with fixed interest rates. And those interest rates are set by Congress. If you take out a federal student loan, the fixed interest rates will not change for the life of the loan. Interest rates for federal student loans are based on the 10-year treasury note and are set annually, and go into effect each July for the coming school year. (You can learn more about federal student loan interest rates here .)
While federal student loan interest rates are set by Congress, private student loan rates are set by each individual lender. Additionally, the rate you get is often determined by your creditworthiness. If you’re new to borrowing money, lenders might not see you as responsible with credit—because you haven’t proved you are yet. And if you’ve proven to be “bad” with credit in the past (aka having a lower credit score, for example), lenders may be less confident about loaning money to you.
For private student loans, there are a few things that determine your interest rate, like your credit score and credit history. Each lender has different credit standards to determine what is best for each borrower.
Student Loan Consolidation
If you’ve got federal student loans, you may be eligible to consolidate your student loans through the federal government with a Direct Consolidation Loan. Consolidating your student loans this way is essentially combining all of your loans into one with a new interest rate and term.
Your new interest rate under a Direct Consolidation Loan is the weighted average of your old loan rates, rounded up to the nearest one-eighth of 1%. Only federal student loans can be consolidated under a Direct Consolidation Loan.
Student Loan Refinancing
Student loan refinancing is similar to consolidation, but is handled differently. Refinancing is offered via private lenders, not the federal government. And instead of combining all your loans and averaging out the interest rate, you can get one new loan to replace all of your old ones, along with a new interest rate.
Your interest rate isn’t based on the interest rates of your former loans. Instead, it’s based on your current creditworthiness and other factors that vary by lender. For example, you may qualify for a lower interest rate when you refinance if you have a solid credit score and history, and can demonstrate you’re responsible enough to pay back your loan.
With SoFi, you can even refinance both federal and private student loans. If you have both, you might want to consider refinancing to see if you can lower your interest rate.
Income-Driven Repayment (IDR) plans are available to federal student loan borrowers who are looking to manage their payments. For an income-driven repayment plan, monthly payments are based off your discretionary income and the size of your family.
This can be helpful because if you’re not making as much as you’d expect while also financially supporting others, IDR plans help make payments more manageable, allowing you to continue making payments you might otherwise be missing.
There are different IDR plans to choose from. But if you’re still making payments after 20 or 25 years—depending on the plan —the remainder of your loan may be eligible for forgiveness. (Note: if you refinance your federal loans with a private lender, you will no longer be eligible for IDR plans and other federal student loan benefits.)
Getting a Cosigner
When you’re looking to refinance your loan, you may not have top-notch credit to land you an awesome interest rate. If that’s the case, you might want to explore cosigner options.
A cosigner can be anyone that agrees to pay your loan in your place if you fail to do so. Does this sound like a major responsibility and an even more significant ask? It is. Making a cosigner liable for you is a big deal. Failing to pay back your loan will still hurt your credit score. But with a cosigner, it will also hurt their credit score.
Whoever your cosigner is—a partner, a friend, a family member—having a plan in place to repay your new loan, including contingencies for potentially coming up short and needing immediate assistance, can provide reassurance to them.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.