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Why Did My Student Loan Interest Rate Go Up?

Interest rates going up on a variable-rate loan can be frustrating. However, there are ways to avoid this particular student loan headache.

Written By: Michael P. Lux, Esq.

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It is no fun to take a look at your monthly student loan statement and see that you are paying a higher interest rate.

It can mean that you have to pay more each month, or it can mean that a larger portion of your payment will go to interest rather than reducing your principal balance. Either way, it sucks.

Unfortunately, there are a number of reasons that your lender may have increased your interest rate. The good news is that there are also a couple of ways to get your interest rate lowered.

Variable-Rate Loans

Variable-rate loans are typically the lowest advertised interest rates. As a result, many people choose these loans.

Lenders cannot raise rates as they please. There is a specific procedure for handling variable-rate loan interest rates. Typically, the interest rate on these loans is typically tied to an index or reference rate, such as the LIBOR rate or treasury bonds. A lender might say that your student loan interest rate will be defined as the LIBOR rate plus 2%. As the LIBOR rate increases or decreases, your interest rate will adjust accordingly.

Your lender may not warn you when the market conditions cause your student loan interest rate to go up. It will show up on your monthly statement, and if you are not looking closely, you will miss it.

As the economy improves, variable-rate student loan holders can expect their interest rates to increase.

To avoid the rise and fall of variable-rate loans, borrowers need to refinance their loans into fixed-rate student loans.

Direct Deposits Issues

Most lenders offer a .25% interest rate reduction for borrowers who sign up for a direct deposit. For borrowers with large balances, this can be a noticeable savings each month.

If there has been a problem with processing an auto-debit, that .25% rate reduction could disappear. The problem could be with your bank, or it could be with your student loan servicer.

Fixing this issue is pretty simple. A call to your bank and/or a call to your lender can usually get any issue resolved with the automatic withdrawals.

Loan Contract Terms

In the world of credit cards, we often see introductory interest rates or “teaser” rates.

Having a term of this nature inserted into a student loan contract would be highly unusual. That said, if you see an interest rate increase, it is a potential explanation.

Getting Interest Rates Lowered

Unless you have the ability to trigger an economic recession, there isn’t anything that can be done to get the interest rate on your variable-rate loan to drop.

However, if you refinance your student loan, you might be able to find a lower interest rate by switching lenders. This will depend upon your credit score and your income, but many people have much better credit scores and incomes after they finish school. As a graduate, you likely are less of a credit risk, and can therefore qualify for a lower interest rate.

Another advantage of refinancing your student loans is that you can opt for a fixed-rate loan. Choosing a fixed-rate loan ensures that even as the economy improves, your interest rate will stay the same. At present, there are over a dozen companies offering student loan refinancing services. The current competitive marketplace can help drive interest rates down for borrowers.

As of July 2024, the following lenders offer the best interest rates on fixed-rate loans:

RankLenderLowest RateSherpa Review
T-1Earnest4.99%Earnest Review
T-1Splash Financial4.99%*Splash Financial Review
3ELFI5.48%ELFI Review

Dealing with Student Loan Interest Rates Going Up

Seeing your student loan interest rate go up is frustrating… especially if your lender provided no warning.

Sadly, borrowers have limited options for preventing future rate increases.

The good news is that there is a logical explanation for what happened, and if you are not happy with your current lender, you can take your business elsewhere.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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