Student Interest Loan

By: EconomyWatch Content   Date: 31 December 2009

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Often the interest rates offered on a student loan, particularly in case of private loans, depends on a student’s FICO score. Thus, maintaining a sound credit rating is the foundation for obtaining a low interest rate loan and reducing the burden of debt on the education loan holder.

 

Fixed Student Interest Loan

 

A student is required to fill a FAFSA (Free Application of Federal Student Aid) form to become eligible for federal fixed-rate loans. Fixed rate student loans generally have lower interest rates than conventional education loans. In fact, fixed rate federal student loans are the lowest in the market, with interest on Perkins loan as low as 5%. Such federal loan programs also enable borrowers to benefit from 6-9 months of grace period after graduation.

Additionally, the PLUS (Parent Loans for Undergraduate Students) loan is a fixed-rate federal education loan. The rate on these loans is fixed at 8.5%, though one may benefit from a 0.25% saving on interest under the ‘PLUS Loan Loophole.’ To utilize this loophole, a borrower has to apply for consolidation of federal student loans. The federal government has put a cap on federal loan consolidation rate, which is 8.25%, effectively bringing down the existing interest rate by 0.25%.  

A fixed rate may also be obtained on a private student loan, though the rate tends to be higher than those under federal programs. However, one may be able to lock-in a lower interest rate by introducing a creditworthy co-signer. 

Variable Student Interest Loan

Variable interest rate student loans are generally based on the Prime Rate or the LIBOR (London Inter-bank Offered Rate). These rates vary frequently; though lenders generally revise rates on a monthly, semi-annually or annual basis. Due to the interest rate fluctuations, the monthly payments also keep changing. An important limitation of borrowing a variable interest student loan is that a lender may not establish a cap on the rate. Consequently, when an economy faces inflationary pressures, the interest rate escalates, which significantly adds to the borrowers’ repayment burden.     

The Congress takes constant measures to regulate interest on student loans. Since the Federal Family Education Loan Program (FFELP) was established in 1965, the public and private sectors have collaborated recurrently to administer low-cost education loans in the nation.


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