Student Loan Rates

By: EconomyWatch Content   Date: 3 December 2009

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An individual’s credit score is an important factor affecting the student loan rates offered by private lenders. However, there are several other factors, which are beyond a borrower’s control. These factors also affect the student loan rates. Adjustable rate student loans typically fluctuate with the economic scenario. In a recessionary economy, the student loan rates tend to go down; whereas the rates go up in a strong economy.

Factors Affecting Student Loan Rates

Besides the general economic condition, the factors that influence adjustable rate student loans are:

 

National Prime Interest Rate

The prime rate is established by the Federal Reserve, which adjusts the rate to respond to economic changes. The national prime rate is increased to curb inflation and lowered to expand lending and control recession. The ‘Fed Rate’ is the interest rate charged by lending institutions from the borrowers. Thus, it directly affects a student’s interest obligations.

London Interbank Offered Rate (LIBOR)
Most lenders use the LIBOR for establishing a common student loan rate during private education loan consolidation. In fact, the LIBOR rate is popularly used by credit-worthy banks across the world to setup student loan rates. This rate fluctuates through the day according to the market conditions, similar to stocks. The LIBOR rate fluctuates independently of the Fed Rate.

Student loan lenders that determine their rates with LIBOR typically readjust their student loan rates on a quarterly basis. Also, such lenders charge an additional percentage, over the LIBOR. This depends on factors such as the amount of origination fee and introduction of a co-signer.

Government Incentives

The federal government offers several incentives to students in need of financial aid for higher education. In a recessionary economy, the government generally extends such incentives to encourage growth and reduce the economic gap. However, the federal agenda for student loans is not fixed. This implies that the loan amount and rates are not guaranteed for the entire duration of the education course.

Furthermore, the student loan rates are affected by the national credit market. A weak credit market, which is a result of high defaults in the economy, shrinks the lending ability of banks. Additionally, the lenders become risk-averse, which ultimately increases the student loan rates offered to borrowers. A high risk borrower, in a weak credit market, will struggle to obtain low prime rates.


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