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The average interest rate for 10-year fixed-rate private student loans rose slightly 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 January 17-21, the average fixed interest rate on a 10-year private student loan was $6 .75%. On a five-year variable-rate loan, the rate was 3.82%, according to Credible.com.
Related: Best Private Student Loans
Fixed rate loans
Last week, the average fixed rate on a 10-year loan rose 0.07% to 6.75%. The average was 6.68% 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. At this time last year, the average fixed rate on a 10-year loan was 5.53%, 1.22% lower than the current rate.
Let’s say you funded $20,000 in student loans at today’s average fixed rate. You’d pay about $230 a month and about $7,558 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Average variable rates on five-year loans fell last week to 3.82% on average from 4.54%.
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.
Financing a private loan of $20,000 over five years at 3.82% would yield a monthly payment of approximately $367. A borrower would pay $2,002 in total interest over the life of the loan. Keep in mind that since the interest rate is variable, it could change monthly.
Related: How to get a private student loan
How to get a private student loan
If you reach the annual borrowing limits for federal student loans or don’t qualify, private student loans may be a decent option. But consider a federal student loan as your first option since interest rates are generally lower. For example, the federal student loan interest rate for undergraduates is 3.73% for the 2021-22 school year. You will also benefit from more liberal repayment and forgiveness options with federal student loans.
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.
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.
Shop for 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.
Remember that those with good or excellent credit usually get the best 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.
The price you will receive
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.