Whether you are refinancing your existing student loans or taking out a student loan for the first time, you want to know that you are getting a good student loan interest rate. After all, nobody likes getting screwed.
The problem with this question
Unfortunately, there is no easy way to answer this question. Whether or not you are getting a good student loan interest rate will depend upon a number of things that vary from one person to the next.
Take a student loan with 5% interest for example. For someone who has no job and a lousy credit history, locking in a rate at 5% could be a great deal. On the other hand, if you have an excellent income and credit score, 5% might actually be a pretty crappy interest rate.
How do I find out if I have a good interest rate?
The key to making sure you are getting a good deal is shopping around. If you were going to buy a tv at Target, you might check the prices on the same tv at Walmart and Best Buy. If the Target tv costs far less, you can be confident that you are getting a good deal.
Student loan interest rates can be evaluated the same way. If you check with five different lenders, you will have a much better understanding of market conditions and how your application is viewed by lenders. If most companies are offering 4% and one lender comes in at 7%, you can feel pretty confident that 7% is a lousy interest rate.
Won’t shopping around hurt my credit score?
No. When your credit is pulled for a credit check, it does result in a slight drop to your credit score. However, credit checks after that do not hurt your score. For credit reporting purposes, the multiple inquiries are considered to be “shopping around” and do not hurt your score any further. Depending upon who you ask, the window for shopping around is 30 to 90 days. The best practice is probably to get all your applications submitted so that the credit checks happen within a couple of weeks.
Should I always go with the company with the lowest interest rate?
The answer here is absolutely not. Many lenders have different terms that must be considered. At the top of the list of considerations is the amount of time you have to pay back the loan. 3% interest might should really good, but if you only have five years to pay it back, the loan could be a mistake. By comparison, a 4% interest loans, with 20 years to pay is a much better deal.
The lender also makes a big difference, because most lenders have different terms. Without question, the best lender to borrow from is the federal government. Loans from the government come with income based repayment plans and student loan forgiveness options. For individuals with an uncertain financial future, these government perks are a must have.