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The average interest rate on 10-year fixed-rate private student loans rose last week. For many borrowers, that means rates continue to be low enough to make private student loans a decent option, especially if you have good credit.
For borrowers with a credit score of 720 or higher who prequalified in Credible.com’s student loan marketplace from June 20 to June 24, the average fixed interest rate on a 10-year private student loan was 6.71%. On a five-year variable-rate loan, the rate was 4.31%, according to Credible.com.
Related: Best Private Student Loans
Fixed rate loans
Last week, the average fixed rate on a 10-year loan jumped 0.41% to 6.71%. The average was 6.30% the previous week.
Borrowers looking for a private student loan can now qualify for a higher rate than they would have at this time last year. This time last year, the average fixed rate on a 10-year loan was 5.70%, 1.01% lower than the current rate.
A borrower financing $20,000 in private student loans at today’s average fixed rate would pay about $229 per month and about $7,509 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Last week, the average five-year variable student loan rate fell to 4.31% on average from 4.43%.
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.
If you were to finance a $20,000 five-year loan at a variable interest rate of 4.31%, you would pay about $371 on average per month. In total interest over the term of the loan, you would pay approximately $2,268. Of course, since the interest rate is variable, it can fluctuate up or down from month to month.
Related: How to get a private student loan
How lenders determine your rate
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.
Apply for a private student loan
Private student loans can be a decent option if you reach the annual borrowing limits for federal student loans or are not eligible. You should consider a federal student loan as your first option, as interest rates are generally lower and you’ll have more liberal repayment and forgiveness options than with a private loan. For example, the federal student loan interest rate for undergraduates is 3.73% for the 2021-22 school year.
When shopping for a private student loan, you will usually need to apply directly with a non-federal lender. This includes banks, credit unions, nonprofits, state agencies, colleges, and online entities.
If you are an undergraduate student with a limited credit history, you will usually need to apply with a co-signer who can meet the borrowing requirements of the lender.
Here’s what to consider when applying for a private student loan:
- Make sure you qualify.Private student loans are credit-based, and lenders typically require a credit score over 600. That’s why having a co-signer can be especially beneficial.
- Apply directly through lenders.You can apply directly on the lender’s website, by mail or by phone.
- Compare your options.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.
Comparison of Private Student Loans
When shopping for a private loan, consider the overall cost of the loan, including the interest rate and fees. You can also consider the type of assistance each lender offers if you are unable to make your loan payments.
If you have good or excellent credit, you are more likely to get the best interest rates.
How much should you borrow? Experts generally recommend not borrowing more than you will earn in your first year out of college. How much can you borrow? Some lenders cap the amount you can borrow each year, while others don’t. When shopping for a loan, let lenders know how the loan is disbursed and what costs it will cover.