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Variable interest rates for student loans
The U.S. Federal Reserve cut its benchmark lending rate in September 2014, citing concerns about weak economic growth. At the time, the Fed’s target range was 0% to 0.25%. In October 2015, the Fed again lowered its benchmark rate, citing concerns over rising inflation. Today, the Fed’s target is 1-to-0.25%, which is still higher than the average interest rate on new federal student loans of 6.8%.
Fixed interest rates for student loans (in most cases)
Interest rates on new federal direct subsidized Stafford loans and Perkins loans have been at historically low levels since 2008–2009, making them attractive to borrowers. However, there are some exceptions. For example, if you took out your first loan before November 30, 2007, then you had fixed interest rates until July 1, 2018. If you take out your next loan starting July 1, 2018, however, you’ll pay variable interest rates. You should know what kind of loans you’re eligible for to make sure you get the best deal possible.
Refinancing your student loans
Refinancing your federal student loans might seem tempting, but keep in mind that loan terms are based on the original loan amount. So if you refinance, you’d have to start paying off the new loan right away. A better option would be consolidating your loans under a single term. Doing so could lower your monthly payments significantly.
Here are some things to consider when deciding whether refinancing makes sense:
What type of loan do I want? If you’re able to consolidate only federal student loans, then refinancing may not be worth the effort.
How much am I borrowing? Your current payment may be less than the total cost of your refinanced loan.
Am I willing to sacrifice my credit score? While refinancing may help boost your score temporarily, you’ll probably experience a dip after refinancing.
Paying back student loans early
If you’ve paid off your student loans completely, you generally cannot receive any additional money or grants to help repay them. But there are ways to get extra funds! Here are several options:
Ask your parents for financial assistance.
Get scholarships.
Variable Interest Rates For Student Loans
Interest rates vary for different types of student loans. Most students take out federal loans, which have fixed interest rates. However, some private student loans offer variable interest rates based on the market rate (e.g., LIBOR). If you’re looking to refinance your current student loan debt, these interest rates are an excellent way to save money.
Variable Interest Rate – What Is It?
A variable interest rate refers to an interest rate that fluctuates throughout the year. A typical variable-interest rate loan would have two components: an interest rate and an index. The interest rate component would remain constant while the index portion changes based on specific factors. For example, the Index Adjustable Rate Mortgage (ARM) is a type of variable interest mortgage where the interest rate is tied to a benchmark interest rate (such as LIBOR), while the index fluctuates annually. In contrast, the Fixed-Rate Home Equity Line of Credit (HELOC) offers a fixed interest rate without any fluctuation in the index.
Where Do These Interest Rates Come From?
The Federal Reserve Board sets the benchmark rate at which banks borrow money from each other, called the Federal Funds Rate (FFR). This rate influences the interest rate on credit cards, auto loans, and mortgages. Banks and lenders use the FFR to set their own lending rates. Typically, they do this by using the FFR as a baseline, then adding an additional percentage point. So if the FFR was 2%, a bank might add 1% to its lending rate.
How Does Variable Interest Work?
Because the interest rate on a variable-rate loan varies according to a certain index, the lender is able to make the same loan at a lower cost than he could if the interest rate remained constant. For example, if the average annual LIBOR is 5% and the index rises to 6%, the interest rate on a 4-year ARM would increase from 5% to 5.25%. On the other hand, if the index falls back down to 5%, the interest rate would drop to 4.75%.
How Low Can You Go?
You may be surprised to learn that borrowers can often get a low interest rate simply by changing the length of time they want to finance their loan. For instance, if you wanted to pay off your student loans over 10 years instead of 30, you’d get a much lower interest rate. One caveat, however, is that the longer you extend the term of your loan, the higher your monthly payment becomes.
Getting Started in Refinancing Your Loan
If you’re currently carrying student loan debt, refinancing your existing loans may be worth consideration. Remember that refinancing means taking out a new loan with an existing creditor. So keep in mind that both the interest rate and the fees associated with refinancing should be considered before proceeding with the loan application process. Fortunately, we’ve got a few tips to help guide you through the process.
Find A Good Creditor
Some companies offer student loan refinancing services, but others charge exorbitant fees for doing so. Before applying, look for a company that doesn’t levy outrageous upfront fees, requires no security deposit, and isn’t owned by a financial institution. Additionally, find a company that provides transparent pricing and terms.
Choose A Lower Interest Rate
Variable Interest Rates For Student Loans
The U.S. Department of Education offers two types of loans which cover different amounts of interest over different time periods. Which type is best for you depends on how much money you need to borrow, what kind of loan (such as Direct Subsidized Loan or Direct Unsubsidized Loan) you choose, and whether you want to pay back the loan sooner than your original plan.
Direct Subsidized Loans
A subsidized student loan is a loan that covers only the interest charged while you’re still in school. If your loan isn’t paid off before graduation, you’ll have to start repaying the principal right away.
Direct Unsubsidized Loans
An unsubsidized loan doesn’t cover any interest until after graduating and starting work. You won’t have to pay back the principal until you stop making payments, even if you don’t graduate. There’s no limit to the amount of interest you’ll pay on these loans.
Which Type Is Best?
If you qualify for financial aid at the college where you plan to attend, you should consider taking out a direct subsidized loan rather than a direct unsubsidized loan. In fact, some colleges may give preference to graduates who take out subsidized loans instead of unsubsidized loans. That way they get their money back faster and you’ll be able to use the rest of your education funds for books and supplies. But make sure you understand the repayment terms of both kinds of loans.
Repayment Terms
For direct subsidized loans, the maximum length of time you can stay enrolled without paying interest is 10 years. After 10 years, you’ll owe 25% of the remaining balance on your principal and interest. For direct unsubsidized loans, the maximum term is 6 years. Once you’ve graduated, you’ll have to begin making monthly payments based on the remaining balance on your loan. Repayment starts six months after you graduate and ends three years later.
Making Payments
Both types of loans require the same monthly payment, regardless of the amount. However, the interest rate differs depending on your loan type. For a subsidized loan, the interest rate is fixed at 2.31%. For an unsubsidized, it varies between 5.52% and 8.41%, depending on your income level.
How to Get Started
Apply online for a federal Direct PLUS Loan. Since the interest rates are cheaper, PLUS Loans are often a good choice for parents who want to help their children pay for college.
To apply for a private student loan, contact a lender directly. Lenders might charge upfront fees but don’t necessarily add additional interest to the loan.
Variable Interest Rates For Student Loans
Student loans have become increasingly popular over the years. The interest rates are often set at low levels as these types of loans are government-backed and therefore considered risk free. Unfortunately, this means that they may not provide borrowers with enough leeway if they need to pay off their debt faster than expected. However, this does not need to be the case. In fact, student loan borrowers can take advantage of some variable interest rate options when making payments or refinancing their loans. Here’s how.
Variable Interest Rate Refinancing
If you’ve had your student loans for a while now, you might want to consider refinancing them. If you do not already know what this entails, then here’s what you need to understand about refinancing. Basically, refinancing is taking out a second loan with a different lender. Doing this allows you to switch lenders without having to go through the entire application process. So, instead of getting a new loan with a fixed interest rate, you get a new loan with a variable interest rate. Variable rates are usually higher than those offered by traditional banks, and are often tied to LIBOR (London Interbank Offered Rate). Most of the time, though, these rates will be lower than any fixed interest rates.
To qualify for refinancing, you need to have an active account with a private student loan servicer. You should find out if your current servicer offers variable rates before applying for a refinance. You will not be able to use a federal loan to help pay off your existing loan balance. The only way to do this is if a private loan was taken out to fund your education. Even so, you would need to complete the same paperwork and submit your payment history to the original lender. After that, the new lender will make the credit decisions on whether your application is approved. Your existing lender will receive notice that your application is being reviewed. Once approval is granted, your new lender will deposit the funds directly into your student account.
Variable Loan Payment Options
Variable interest rates can be great when you plan to stay on top of your payments, however, they can also be damaging if you fall behind. Fortunately, several options exist that allow you to adjust your monthly payments according to your financial situation. One option includes adjustable rate mortgages. These offer a fixed interest rate until the end of the term, and then begin to rise. Another option includes graduated payment plans. These allow you to increase or decrease your repayment amounts based on your income level. There are even programs designed specifically for people who are self-employed or have flexible schedules. Finally, you could also opt to pay extra money each month toward your loan, if you agree to delay paying back your principal.
The Bottom Line
Refinancing your student loans can help you save money in the long run. Plus, it gives you flexibility in terms of how much money you owe. But, it is always best to consult a professional before settling on a new loan agreement. This way, you can ensure that you get the best deal possible.
Variable Interest Rates For Student Loans
Here’s a little something I’ve been working on. What do you think? Do you have any questions about this? Any ideas for improvement? This is my first attempt at writing, so let me know how it went!
This video goes over how interest rates work and how they affect students seeking federal student loans. You’ll learn about private loan programs and what they offer, and we look at some government scholarships. Let us know what you think!
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