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Last week, the average interest rate on 10-year fixed-rate private student loans rose. This is good news for borrowers interested in applying for private student loans.
For borrowers with a credit score of 720 or higher who prequalified in Credible.com’s student loan marketplace from February 21 through February 25, the average fixed interest rate on a 10-year private student loan was 6.19%. On a five-year variable-rate loan, the rate was 4.04%, according to Credible.com.
Related: Best Private Student Loans
Fixed rate loans
Last week, the average fixed rate on a 10-year loan rose 0.29% to 6.19%. The average was 5.90% the previous week.
Borrowers looking for a private student loan can now qualify for a lower rate than they would have at this time last year. At this time last year, the average fixed rate on a 10-year loan was 6.46%, or 0.27% higher than the current rate.
A borrower financing $20,000 in private student loans at today’s average fixed rate would pay about $224 per month and about $6,874 in total interest over 10 years, according to Forbes Advisor’s Student Loan Calculator.
Variable rate loans
Average variable rates on five-year loans rose last week from an average of 4.02% to 4.04%.
Unlike fixed rates, variable interest rates fluctuate over the term of the loan. Variable rates can start lower than fixed rates, especially during times when rates are generally low, but they can increase over time.
Private lenders often offer borrowers the option of choosing between fixed and variable interest rates. Fixed rates may be the safest bet for the average student, but if your income is stable and you plan to pay off your loan quickly, it might be beneficial to choose a variable loan.
If you were to finance a $20,000 five-year loan at a variable interest rate of 4.04%, you would pay about $369 on average per month. In total interest over the term of the loan, you would pay approximately $2,121. Of course, since the interest rate is variable, it can fluctuate up or down from month to month.
Related: How to get a private student loan
How your interest rate is determined
The rate you receive varies depending on whether you get a fixed or variable loan. Rates are partly based on your creditworthiness – those with higher credit scores often get the lowest rates. But your rate is also based on other factors. Credit history, income, and even the degree you’re working on and your career can all play a part.
Apply for a private student loan
If you meet the annual borrowing limits for federal student loans or don’t qualify, private student loans may be a good choice. But consider a federal student loan as your first option since interest rates are generally lower. For example, the federal student loan interest rate for undergraduates is 3.73% for the 2021-22 school year. You will also benefit from more liberal repayment and forgiveness options with federal student loans.
Obtaining a private student loan usually involves applying directly through a non-federal lender, such as a bank, credit union, or online entity. You may also be able to get a private student loan through a nonprofit organization, state agency, or college.
Keep in mind that undergraduate students with limited credit histories often need a co-signer who can meet the borrowing requirements of the lender.
Here’s what to consider when applying for a private student loan:
- Make sure you qualify.Private student loans are credit-based, and lenders typically require a credit score over 600. That’s why having a co-signer can be especially beneficial.
- Apply directly through lenders.You can apply directly on the lender’s website, by mail or by phone.
- Compare your options.Look at what each lender is offering and compare the interest rate, term, future monthly payment, origination fees and late fees. Also check to see if the lender offers a co-signer release so that the co-borrower can potentially opt out of the loan.
Shop for Private Student Loans
First, look at the overall cost of the loan. Consider both the interest rate and the fees. Also, look at the type of help each lender offers if you are unable to pay your payments.
If you have good or excellent credit, you are more likely to get the best interest rates.
Experts generally recommend that you don’t borrow more than you will earn in your first year of college. While some lenders cap the amount of money you can borrow each year, others don’t. When comparing loans, determine how the loan will be disbursed and what costs it will cover.