After nearly a decade of writing about student loans and helping thousands of borrowers along the way, I’ve seen plenty of borrowers who had excellent interest rates and others who were paying way too much.
In my experience, a good interest rate falls between 2% and 4%, while the bad rates start at about 8%.
Yet this simple answer misses the point. If you are investigating what constitutes a “good” student loan interest rate, you are likely trying to avoid paying too much. Nobody wants to get ripped off by their lender.
If you want a decent student loan, you need to consider a few factors beyond the headline interest rate.
Federal vs. Private: Looking Beyond Interest Rates
Many private student loans offer interest rates lower than federal loans. However, federal loans are still a much better choice for the vast majority of student loan borrowers.
For many borrowers, a federal loan charging 8% interest is superior to a private loan charging 2%.
The obvious benefits to federal loans are the options for student loan forgiveness and income-driven repayment. Federal loans also include lesser-known protections like disability discharge borrowers that become disabled. The Covid-19 payment and interest freeze also demonstrate how Congress and the President can help federal borrowers in unexpected new ways.
Finally, if borrowers decide that they will no longer need any federal benefits, they can always refinance their loans at a lower interest rate with a private lender.
Fixed vs. Variable Interest Rates
A 2.5% fixed-rate loan is better then a 2.5% variable-rate loan.
The security of knowing the interest rate will never go up is valuable. This is especially true for long-term loans.
If you are going to repay your loans quickly, it might make sense to opt for the lowest possible variable-rate loan. If you are going to have a loan for many years, it might be better to lock down a fixed-rate loan.
This advice could change as market conditions evolve. If interest rates across the economy were near record highs, opting for a variable-rate loan might make sense. However, we are near record lows. If you lock in a fixed-rate loan when rates are down, when rates inevitably increase, your decision will look smart.
For example, in the refinance market, borrowers can currently select a 20-year fixed-rate loan at just over 3%. From a historical perspective, that number is absurdly low.
Finally, choosing a fixed-rate loan protects borrowers if inflation becomes an issue.
Loan Origination Fees and Other Expenses
Some loans come with large origination fees.
Years ago, this was standard practice in the student loan industry. Today, most reputable private lenders have eliminated origination fees.
If you are considering a private student loan with an origination fee, it is essential to factor in the fee when comparing interest rates.
Shopping Around for the Best Interest Rate
In the beginning, I said that a student loan with a 4% interest rate was a good interest rate. However, if you can qualify for a 2% interest rate, 4% isn’t so good.
Some borrowers will qualify for the lowest advertised rates with most lenders. Other borrowers will struggle to get approved. Regardless of where you fall on the credit spectrum, shopping around is critical.
The only way to know that you are getting a reasonable rate is to check rates with multiple lenders. If you are looking for a student loan, that means using a tool like Credible to see the rate options available.
If you already have student loans and want to know whether or not you are getting a good rate, compare your current loan to the rates available through refinancing. If you have a private loan and can refinance it at a much lower rate, it means your current rate isn’t very good.
Finding a Good Interest Rate: Frequently Asked Questions
No. When your credit is pulled for a credit check, it does result in a slight drop in your credit score. However, credit checks after that do not hurt your score.
For credit reporting purposes, the multiple inquiries are considered “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.
No. The best interest rate and the best loan are often different. A federal loan might have a higher interest rate but be a much better option.
The interest rate is a major consideration when evaluating student loans and student loan refinancing, but it isn’t the only detail that matters.
Two major factors influence interest rates.
Economic circumstances – When interest rates across the economy are dropping, it is probably a good time to make sure your student loan rates are still good.
Personal circumstances – If your credit score just went up, or you got a great new job, you may qualify for better interest rates.
If there are changes to the economy or your credit profile, it is time to recheck rates.