If you have student loans, one of the keys to paying off your balance is understanding your interest rate and how it works.
Depending on which type of loan you have, your rate could fluctuate over time, which means you could end up owing more and more money. There are a few ways to prevent that from happening, though, as we’ll detail.
The biggest difference to keep in mind is that between federal and private loans.
Federal student loans
Interest rates for federal student loans are set by the government. They’re the same for everyone (termed standardized) but change yearly. Here are the rates if you were to take out a federal loan today, per StudentAid.gov:
As the graph notes, these rates are fixed for the life of your loan, unlike with private loans.
Private student loans
Individual lenders dictate their own interest rates, which means you’ll want to shop around at different lenders to find the most competitive rate. You might even find a lower rate than the government offers. Still, that’s dependent on your credit score and some other factors, and it could be variable.
Obviously, when you shop around, you want to opt for the loan with the lowest Annual Percentage Rate (APR). Discover gives this example of just how much a few percentage points can cost you over the long term:
On a $10,000 undergraduate loan with a fixed 6.49 percent interest rate, in-school deferment for 45 months, a 6-month grace period and 15-year term, your monthly payment could be $111.05, and you would pay $9,989 in interest over the loan’s lifetime. If the same loan has an 12.49 percent interest rate, your monthly payment could be $188.53 and you would pay $23,933 in interest — an $13,944 difference.
That said, there are other factors to consider: Make sure you read and understand all of the terms before you sign the dotted line.
For example: For years, borrowers benefitted, in a sense, from a low rate environment. But now that the Federal Reserve has been steadily raising rates, your student loan interest balance could also be influenced, if you have a variable rate. Your rate might be changed monthly, quarterly or annually, depending on your lender. You want to understand your interest rate terms when shopping around.
Evaluate your fixed-rate options
If you do have a variable-rate loan, one way to prevent further fluctuation is to refinance into a fixed-rate loan. To be clear, this might not result in a lower rate than what you currently have, but it will give you peace of mind that your rate won’t suddenly double over night.
Alternatively, “if you’ve been paying your loan on time, you may be able to convince your lender to switch your variable-rate loan to a fixed one without refinancing,” reports Marketwatch. But that’s something you’d need to work out with your lender and is highly individualized.
You can read more about refinancing and consolidating loans here. Bottom line: Familiarize yourself with your current interest rate and whether or not your loan is fixed- or variable, as well as your repayment schedule. That will help you tackle your debt effectively.