How to get a low interest student loan

The cost of higher education continues to climb. Those costs can grow over time if a student is locked into an unfavorable interest rate that makes the loan cost significantly more over the life of the repayment period.

While the interest rates on federal student loans are typically fixed for all borrowers, private student loans can offer a wide range of rates. By shopping around and comparing rates, it is possible to secure a low interest rate student loan. This can significantly reduce your financial burden when repaying your loans after school.

What are current student loan interest rates?

Here are current student loan interest rates as of September 2023:

Federal student loans 5.50% to 8.05% fixed Private student loans 4.89% to 16.99% variable, 4.42% to 16.99% fixed Refinancing loans 5.49% to 10.68% variable, 4.96% to 9.99% fixed

These rates are averages but give you an idea of what to expect regarding borrowing costs when taking out a student loan. If you’re seeking a private student loan or want to refinance your current student loan balances, shop around to find lenders offering interest rates within these ranges to ensure you get the lowest rate available.

The recent Federal Reserve rate hikes have affected borrowers with variable student loans. Since March 2022, the Fed has implemented several rate increases. If this trend continues, interest rates on variable student loans increase even more. As of Sept. 2023, interest rates have climbed to 5.50% for fixed-rate federal loans, including Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduates. These rates are expected to be in effect through July 2024, at which point the rates may change again. Loans disbursed before July 1, 2023, likely have a different interest rate.

How to get a low interest student loan

Student loan rates are largely determined by external factors, like market conditions. However, you can take action to improve your financial health and attract the best offers. It’s equally important to do the legwork to find competitive student loans that offer valuable incentives.

When you’re ready to shop for student loans, use these strategies to find the lowest interest rate available.

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Compare rates

If you plan to take out federal student loans to finance your educational expenses, your rate depends solely on the type of loan you choose. Federal student loan interest rates are the same for all borrowers for each type of loan, no matter the borrower’s income or credit score. The interest rates for the upcoming school year are determined every spring.

If you’re considering a private student loan, it’s critical to dig a little deeper. The interest rate you receive with a private lender depends on factors like your credit score, income and whether you’re applying with a co-signer. Getting quotes from a few different lenders is the best way to find a low interest student loan.

With Bankrate’s private student loan tool, you can enter basic details about yourself and what you’re looking for to view potential offers. Then, you can visit individual lenders and go through the prequalification process to get rate offers you can compare.

Choose between fixed and variable rates

As their names suggest, fixed interest rates remain the same during the loan term, while variable rates fluctuate over time based on market conditions. While variable rates typically start lower than fixed rates, you may pay more interest over time if interest rates rise. As a result, fixed rates are a better bet in most cases.

However, if you have good reason to expect interest rates to go down and have a relatively short repayment term, it may not be as risky to go with a variable-rate loan.

Apply with a co-signer

Many students are young and haven’t had the opportunity to establish a credit history. If you don’t have a credit history, you might find it difficult to qualify for a low interest rate on a private student loan by yourself. Some lenders will charge a higher interest rate or decline your application entirely.

If a loved one with a well-established credit history is willing to co-sign for your loan, their good credit could work in your favor. Just keep in mind that co-signing is a big commitment. Your loved one will put their credit score on the line to help you lock in a low interest student loan.

If you miss a payment or default on your loans, the lender will come after the co-signer. Even if you never pay late, adding a student loan to your loved one’s credit report could affect their ability to qualify for future loans. Your co-signer needs to understand the risks involved.

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Improve your credit score

Good credit can work to your advantage with private student loans, just as with most other loans. Improving your credit score before applying for a new loan is always a good idea.

Higher credit scores signal to lenders that you’re a lower credit risk, meaning you’re more likely to repay your loans on time. As a result, many lenders may see you as a more attractive borrower and offer you lower interest rates to win your business.

You can typically get approved for a private student loan with a credit score in the mid-600. To obtain a low interest student loan, you or your co-signer should score in the mid-to-upper 700s. If your credit isn’t optimal, you could face private loan interest rates in the upper or double digits.

Here are a few steps you can take to build your credit:

  • Have a loved one with good credit add you as an authorized user on their credit card.
  • Open a credit card of your own, keep your balance relatively low and pay it off monthly.
  • Pay all of your other debts on time each month.
  • Avoid applying for additional credit unless you need it.
  • Review your credit reports for errors and dispute them.

Take advantage of autopay discounts

Federal and private student loan lenders offer discounts if you sign up for automatic monthly payments. Autopay discounts will normally save you 0.25 percent off your normal interest rate.

Autopay may also be a good idea from a credit perspective. When you opt for automatic payments, the odds of accidentally missing a payment go down. This can protect you from late payments that might damage your credit score.

Choose the shortest loan term

Your loan term, also called the repayment period, impacts the amount of money you pay back to your lender each month. Selecting a shorter term typically translates to a higher monthly payment, but loans with shorter repayment periods often feature lower interest rates.

To pay less interest, choose the loan with the shortest repayment term — though make sure you can still comfortably afford the monthly payment.

For example, if you have $20,000 in student loans with a 10-year repayment plan and a 6 percent interest rate, your monthly payment would be about $222, and you’d pay roughly $6,645 in interest. However, if you opt for a seven-year plan and qualify for a 5 percent interest rate, your monthly payment would jump to about $283, but you’d only pay roughly $3,745 in interest.

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Ask about other discounts

In addition to autopay discounts, some lenders offer other opportunities to save money on private student loans. For example, you might come across interest rate reductions such as:

  • Loyalty discounts when you have (or open) a bank account with the same lender.
  • Repeat customer discounts.
  • On-time payment discounts (after you make a certain number of timely payments).
  • Interest-only payment discounts.
  • Special promotional discounts designed to attract new customers.

The size of these rate discounts can differ from lender to lender, and some don’t offer discounts. But if you can stack multiple rate discounts together, you may be able to amplify your savings.

Can you get a good student loan interest rate with bad credit?

If you have poor credit, a federal loan is your best option for a competitive interest rate. Federal loans don’t consider your credit score, so every borrower gets the same interest rate. For the 2022-23 school year, the interest rate for undergraduate federal student loans is 4.99 percent — competitive with what private companies offer.

Getting a good rate will be trickier if you need to borrow money from a bad credit private student loan lender. Most private student loan companies require a credit score of around 650 or higher to qualify, but having a score near that minimum will translate to higher rates. Having bad credit could mean a student loan interest rate in the double digits.

There are some ways to get around this. Some lenders advertise that they work with poor-credit borrowers, weighing factors like income and earnings potential ahead of credit. You can also get a good student loan interest rate if you apply with a co-signer with good credit.

The bottom line

Securing a low interest student loan might not seem important when you’re still in school. But before you commit to a student loan that could take several decades to pay off, it’s crucial to make sure that you’re securing the best deal available. Even a marginally better interest rate could add up to significant savings over the life of your loan.

As you consider your options, consider using a student loan calculator to understand how interest rates will affect you over the life of your loan, and consider potential strategies you can use to reduce your total interest charges.