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 Each year, new student loan interest rates are published. Overall, interest rates have been relatively low - nothing compared to the rates that we experienced back in the early 1980s. That's good news for students because even though they can do very little to control the rising cost of tuition at their colleges, at least the interest rate on their student loans are reasonable.
Student Loan Loophole
The federal government is starting to pay a bit more attention to student loans and the interest rate charged on those loans. We talked about the student loan loophole, which funnels billions of dollars into the hands of lending institutions by subsidizing low interest rate loans. If it gets passed, the Student Aid Reward Act has the potential to save taxpayers billions of dollars, while putting more money to work for students in the form of additional funds for loans.
Current Student Loan Interest Rates
These interest rates we're going to talk about are for student loans that were disbursed starting on or after July 1, 1998. Interest rates also change annually, so we're talking about the time period from July 1, 2007 through June 30, 2008.
Direct Loans
Direct Student Loans are one of the Federal Student Aid or FSA programs that are available through the Department of Education. Direct Student Loans provide students with a way to borrow money to pay for their costs of higher education.
The Direct Loan interest rates for loans taken, or disbursed, on or after July 1, 2007 currently carry a 6.80% fixed rate of interest. Direct PLUS loans - which are made to parents of students - issued in that same timeframe charge a rate of interest of 7.90% for 2007 / 2008.
Direct or Federal PLUS Loans
Federal PLUS loans, which are also known as Direct PLUS loans are taken out by the parents of students - not the students themselves. The abbreviations PLUS stands for Parent Loan for Undergraduate Student. These are federally insured loans parents can take out to pay for a dependent's education.
For the time period July 1, 2007 through June 30, 2008, the interest rate for new PLUS loans are 8.02%. The interest rate on PLUS loans will vary from year to year, but will never exceed 9.0%. For PLUS loans disbursed prior to July 1, 2006 the interest rate is 7.94%.
Stafford Loans
Federal Stafford loans pretty much follow the same guidelines as Direct Loans. So the interest rate on Stafford loans is disbursed starting on July 1, 2007 is a fixed rate of 6.80%. Stafford loans disbursed between July 1, 2007 and June 30, 2008 have a variable interest rate that changes on July 1st of each year, but cannot exceed 8.25%. The current rate of interest on these student loans is 7.22% for those in repayment and 6.62% for loans during in-school, deferment and grace periods.
The interest rate on a Stafford loan is based on the 91 day Treasury Bill rate with the exact formula being:
- For in-school, grace, and deferment periods - the 91-day T-bill rate + 1.70%
- During repayment periods - The 91-day T-bill rate + 2.30%
Consolidation Loans
Federal consolidation loans are just that - the consolidation of multiple loans into one monthly payment. This means the exact interest rate on these loans needs to be calculated on an individual basis using a weighted average calculation approach. A simplified formula for weighted average is:
(Loan 1 ($) x Interest Rate + Loan 2 ($) x Interest Rate) / (Loan 1 ($) + Loan 2 ($))
As a rule of thumb, the consolidated loan interest rate can never be higher than the highest interest rate of an individual loan. As a borrower, you can expect a consolidated loan in the range of 4.75% to 6.125%.
Interest Rates on Private Loans
The interest rates on private loans can be nearly as numerous as the number of agencies writing those loans. In general, private loans in 2007 / 2008 can range from a low of around 6% to as high as 12%.
The exact interest rate will depend on your credit score, the amount borrowed and the term or length over which the loan is repaid. As a rule of thumb, the interest rates of these loans are indexed against the Prime lending rate - sometimes referred to as Prime plus.
Student Loan Fees
Under some private student loan programs the lending institution may charge a loan fee. Fees for student loans are typically stated in terms of a percentage of the loan - just like points on a mortgage. The exact fee paid will depend on the loan program itself, the credit rating of the student and the interest rate charged.
Student Loan Fee Example
For example a lender might offer a student a loan with an interest rate of 7.15% and a 1% fee. If the student was borrowing $10,000, then the fee would be added to the loan's principal. In this example the student would have to pay back $11,000 in principal plus interest at 7.15%.
If you're thinking about taking out a private student loan and the lender is charging a fee then you can use one of our many mortgage calculators to see the exact impact on the fees on your monthly payments. If you have a choice of paying a fee for a reduced interest rate on the loan, our calculators can help you figure out which loan is best given your financial situation and the loan offer.
About the Author - Student Loan Interest Rates
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