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Last week, the average interest rate on private 10-year fixed-rate student loans rose. Overall, rates remain fairly low, making private student loans an attractive option for borrowers looking to fill a gap in college funding.
From October 10 to 15, the average fixed interest rate on a 10-year private student loan was 7.39% for borrowers with a credit score of 720 or higher who prequalified in the student loan market of Credible.com. On a five-year variable-rate loan, the average interest rate was 8.87% among the same population, according to Credible.com.
Related: Best Private Student Loans
Fixed rate loans
Last week, the average 10-year fixed rate rose 1.02% to 7.39%. The previous week, the average was 6.37%.
Borrowers looking for a private student loan can now qualify for a higher rate than they would have at this time last year. At this time last year, the average fixed rate on a 10-year loan was 5.41%, 1.98% lower than the current rate.
If you were to fund $20,000 in student loans at today’s average fixed rate, you’d pay about $236 a month and about $8,351 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Average variable rates on five-year loans rose last week from an average of 7.97% to 8.87%.
Unlike fixed rates, variable interest rates fluctuate over the term of the loan. Variable rates can start lower than fixed rates, especially during times when rates are generally low, but they can increase over time.
Private lenders often offer borrowers the option of choosing between fixed and variable interest rates. Fixed rates may be the safest bet for the average student, but if your income is stable and you plan to pay off your loan quickly, it might be beneficial to choose a variable loan.
Let’s say you financed a loan of $20,000 over five years with a variable interest rate of 8.87%. You would pay around $414 on average per month. You would pay approximately $4,834 in total interest over the life of the loan. Keep in mind that since interest is variable, it can fluctuate up or down from month to month.
Related: How to get a private student loan
How your interest rate is determined
Lenders offering private student loans generally offer fixed and variable interest rates. These rates are, in part, based on your creditworthiness. Generally, the higher your credit score, the lower the interest rate you will receive. But credit history, income, the degree you’re working on, and your career can also factor into the interest rate you receive.
Get a private student loan
Before turning to a private student loan, consider a federal student loan as your first option. Interest rates on federal student loans are generally lower. Federal student loans also tend to have much more generous repayment and forgiveness options. Still, if you’ve reached federal student loan borrowing limits or don’t qualify, private student loans may be a good solution.
To obtain a private student loan, you will usually need to apply directly with a non-federal lender. You can find private student loans from banks, credit unions, and online entities. Nonprofit organizations, state agencies, and colleges also offer loans.
It is important to note that you will need a qualified co-signer if you have a limited credit history, as undergraduate students often do.
When applying for a private student loan, consider the following:
- Your qualities. Private student loans are credit-based. Lenders typically require a credit score above 600. This is where having a co-signer can be particularly beneficial.
- Where to apply. You can apply directly on the lender’s website, by mail or by phone.
- Your choices. Look at what each lender offers and compare the interest rate, term, future monthly payment, origination fees and late fees. Also check to see if the lender offers a co-signer release so that the co-borrower can potentially opt out of the loan.
How to Compare Private Student Loans
When comparing private student loan options, take a close look at the overall cost of the loan. This includes the interest rate and fees. It’s also important to consider the type of help the lender offers if you can’t afford your payments.
If you have good or excellent credit, you are more likely to get the best interest rates.
Experts generally recommend that you don’t borrow more than you will earn in your first year of college. While some lenders cap the amount of money you can borrow each year, others don’t. When comparing loans, determine how the loan will be disbursed and what costs it will cover.