Many private student loan lenders offer both fixed and variable interest rates, enabling eligible borrowers to choose the option they prefer. Interest rates are determined based on the credit rating of the borrower and cosigner.
How Variable Interest Rates are Determined
Variable rates are calculated based on the sum of two interest rates: a variable index rate and a fixed margin. The index rate increases or decreases based on changes in a standard interest rate, such as the London Interbank Offered Rate (LIBOR) or Wall Street Journal Prime Lending Rate (WSJ Prime). The margin is based on the credit scores and credit histories of the borrower and cosigner. Better credit will result in a lower margin, yielding a lower interest rate.
Variable Interest Rate = Variable Index Rate + Fixed Margin
Your interest rate can change whenever the index rate changes:
- The one-month LIBOR resets every month; the three-month LIBOR resets quarterly, the six-month LIBOR resets twice a year and the one-year LIBOR resets annually.
- The WSJ Prime Rate, the rate banks charge their most favored customers, changes when the two-thirds of the 30 largest banks surveyed by the Wall Street Journal change their rates.
If your interest rate is 1M LIBOR + 2.5%, the rate is calculated by taking the current one-month average LIBOR rate plus an additional 2.5 percentage points.
How to Get a Lower Interest Rate
- Apply with a cosigner who has very good credit scores and a strong credit history.
- Take advantage of any interest rate discounts (such as a 0.25% reduction for signing up for automatic debit) offered by your lender.
- Consider private student loan consolidation (also known as refinancing) after you start repaying your loans. If your credit or your cosigner's credit has improved, you may qualify for a lower interest rate.