Student Loan Interest Rate

By: EconomyWatch Content   Date: 31 December 2009

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Student loan interest rate varies from lender to lender, though typically federal student loans have a uniform rate. All federal Stafford loans offered from July 1, 2006 to June 30, 2008 had an interest rate of 6.8 percent. The interest rate on subsidized Stafford loans has since declined gradually. Subsidized Stafford loans disbursed between July 2008 and 2009 had a fixed rate of 6.0%, which has thereafter reduced to 5.6%. However, the unsubsidized Stafford loans have remained stable at 6.8%. The government-backed Perkins Loan has a fixed interest rate of 5%.

Student Loan Interest Rate: Consolidation

 

Interest rate calculation under student loan consolidation differs for federal and private student loans. Consolidation interest rates on federal student loans are computed by taking the average interest rate of all loans, which is rounded-off to the nearest 1/8 percent. The consolidated student loan interest rate is capped at 8.25%.

The PLUS Loan Consolidation Loophole

The PLUS Loan is a federal student loan offered to parents. Under the Higher Education Reconciliation Act of 2005, the interest rate on these loans was fixed at 8.5%. However, since the federal student loan consolidation cap is 8.25%, a PLUS Loan borrower can save 0.25% on interest through consolidation. This is recognized as the PLUS Loan consolidation loophole.

Private education loan consolidation interest rates vary from lender to lender. Individual lenders establish a consolidated student loan interest rate based on either:

  • The LIBOR (London Inter-bank Offered Rate) or
  • The Prime Rate setup by the Federal government

Lenders usually add a margin for the credit of the borrower and/or co-signer. Additionally, they charge origination fee, which is between 1% and 5%, depending on the borrower’s credit. 

Student Loan Interest Rate: Considerations

Student loan interest rate during consolidation is also affected by the deferred interest amount. Lenders generally capitalize the deferred interest on the original loan, and include it in the consolidation. A high deferred interest may add to the ultimate consolidated student loan interest.

Additionally, the student loan consolidation application period also impacts the student loan interest rate. When student loans are consolidated before entering repayment, a borrower may be able to acquire a lower interest rate. This is because before repayments become due, the consolidation is based on the ‘in-school’ interest rates, which tend to be lower.


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