Student Loan Interest Rate Comparison

Jon O'Donnell Updated on May 14, 2019

Interest is the price you pay for borrowing money. It sounds simple enough, but student loan interest rates can be complicated. Nitro has put together everything you need to know about student loan interest rates. Read on to find out what the fine print means, how interest rates are determined, and how to score the lowest rate when refinancing college debt.

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Student loan vocabulary:

  • Principal – The original amount of your loan, without any interest or fees.
  • Interest – The cost of borrowing money. It is calculated as a percentage of your principal and is usually charged monthly.
  • Repayment term – The period of time over which you will pay back your loan.
  • Lender – The institution that provides the funds for your loan.
  • Servicer – Some lenders have a servicer that handles payments and acts as an intermediary between the lender and borrower.
  • Fixed interest rate – An interest rate that stays the same. It is determined at the beginning of the loan, based on market conditions or Congressional action, and does not change.
  • Variable interest rate – An interest rate that can rise or fall during the loan period, based on shifting economic conditions. Variable interest rates typically start out lower than fixed interest rates, but they’re riskier for borrowers because they can rise. Some lenders adjust their variable rates every three months; others change them monthly. Some loans have caps that limit how high the rate can go.
  • Cosigner – A second person, usually a family member, who accepts responsibility for the loan if the original borrower fails to pay.
  • Capitalization – When accrued interest is added to loan principal. This happens when people defer payments, or pay less than the monthly interest. It increases the total amount owed.
  • Consolidation – Combining multiple loans into one new loan with a single monthly payment. It may or may not have more favorable terms.
  • Refinancing – Paying off old debts with a new loan that usually has more favorable terms.
  • Income-based repayment – A federal repayment option for some borrowers that limits monthly payments to 10 percent of their discretionary income.
  • Deferment – A period of time during which eligible borrowers can postpone loan repayment. Loans may or may not accrue interest during deferment.
  • Forbearance – Some people who experience economic hardship may qualify for a forbearance, which allows them to stop making payments for a period of time. Interest accrues during forbearance.

How federal student loan interest rates are determined

People often assume that government loans have the lowest rates, but that’s often not the case. Congress sets federal student loan interest rates each year, based on financial market conditions and other economic factors. Rates vary depending on the loan type and the year the loan is originated, but the rates are fixed and are the same for all borrowers regardless of their credit history. Federal rates are often higher than private rates because the Department of Education has to account for high-risk applicants who are more likely to default or not finish their degrees. For most federal loans, graduate students are charged more than undergrads. 

How private student loan interest rates are determined

Banks and other lenders set their interest rates based on market conditions and risk. Rates vary based on the borrower’s credit history, the length of the loan, and the type of interest (fixed vs. variable), but are generally loosely related to the Federal Reserve’s prime interest rate or the London Interbank Offered Rate. Private lenders are often able to offer lower rates than the government because they can be selective about their borrowers. Not everyone who applies is approved. Generally, the better your credit, the lower the interest rate you’ll receive.

Factors that affect your interest rate

Lenders consider a variety of factors when deciding how much interest to charge you. Ultimately, it comes down to risk and how likely you are to pay back your debt. Among the things lenders look at are your FICO score, employment history, debt-to-income ratio, and expenses such as housing costs, car payments, and credit card debt. Your interest rate can also vary depending on whether you have a cosigner. In some cases, you can get a better rate by having a family member or spouse guarantee your loan.

How student loan amortization works

Even if your student loan payments are the same amount every month, the portion that goes to principal and the portion that goes to interest change over the life of the loan. When you first start making payments on your student loans, a larger percentage of your payment goes toward interest, and a smaller portion goes toward your principal. In some cases, you might not be paying anything toward principal. However, as you continue making payments, those percentages flip. By the end of your loan term, the majority of your payment is applied to your principal.

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How deferment, forbearance, and income-based repayment affects interest

Sometimes, borrowers can postpone student loan payments or make lower payments immediately after graduation or during periods of economic hardship. Although these adjustments can be helpful to graduates who are not yet established in their careers, they come at a cost. During deferment, some loans accrue interest, and some don’t. However, all loans accrue interest during forbearance. When interest accrues, it gets added to the principal through capitalization (also known as negative amortization). Borrowers in this scenario may later have to pay interest on the interest. This can also happen with income-based repayment plans when people pay less than the interest charged.

How federal consolidation affects your interest rate

The U.S. Department of Education has a Direct Consolidation Loan that can bundle your federal debts into a single bill. The benefit is that you can simplify your college debt while remaining eligible for some federal repayment and loan forgiveness benefits. However, private loans are not eligible and it does not lower your interest payment. In fact, your interest rate might go up a bit. The government uses a weighted average of the underlying interest rates, which is rounded up to the nearest eighth of a point.

How private refinancing affects your interest rate

Refinancing is the only way to lower the interest rate on a pre-existing loan. Both private and federal loans can be refinanced with a private lender, and usually replaced with a new loan that has much better terms. A recent analysis by Nitro found that people who refinanced student loans saved an average of $259 a month and $19,231 over the life of the loan. Some borrowers saved more, and some less, depending on the size of their debt and their credit histories. However, the average savings were significant.

How to get the lowest interest rate on your student loans

Chances are, there wasn’t much you could do about the interest rate when you first took out your student loans. However, graduates who have been out of school for a little while are in a much better position to renegotiate. The best way to get a low rate on your student loans is to build up your credit and then refinance. Having a steady job, a good credit score, and a low debt-to-income ratio will qualify you for the best deals. It’s also a good idea to shop around with different lenders. Although most private lenders have similar underwriting criteria, there are subtle differences. If you want to refinance, but your credit isn’t as strong as you’d like, consider applying with a cosigner who has a high FICO score.

A simple way to see if you could get a lower interest rate

Curious about whether you could get a lower interest rate by refinancing? There’s no need to wonder. Most modern student loan refinancing companies have online applications that take less than 15 minutes to complete. You can get an instant decision with no application or origination fees, and there’s no need to worry about the effect on your credit. The initial inquiry is considered a “soft pull” and does not impact your score.

There are dozens of companies that specialize in student lending, but not all are created equal. As part of our mission to help students and their families manage education costs, Nitro regularly review lenders. The following are the companies we consider the nation’s best banks for student loan refinancing, based on their interest rates, transparency, product offerings, ease of applying, and customer service.

If you want to pay less interest on your student loans, we recommend that you start with the lenders listed in the table below... 

Published in: Refinance

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell

Refinance and Save Today With These Lenders

#1 - Comet Recommended View More Details

Works with 275+ not-for-profit community lenders for higher approval chances

  • APR: 2.49% - 7.50%
  • Minimum credit score: 660
  • Refinance up to $300K
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Visit LendKey View Loan Disclosure

LendKey operates student loan programs for over 275 not-for-profit and community lenders across the country. By partnering with these lenders, LendKey is able to give consumers direct access to the best rates available from the most borrower friendly institutions. As the servicer of all loans obtained through its platform, you can rest easy knowing your personal information will be safe and that the best customer service team will be ready to answer your questions from application until your final payment.

LendKey Student Loan Refinance review

  • Lightning fast rate check - 2-minute rate check with no impact on your credit score
  • More lenders, more options - see the best offers from over 275 not-for-profit and community lenders for higher approval chances
  • Life of loan relationship - With LendKey, your personal information will never be sent or passed on to third parties. Their customer service team is with you from the moment you land on their website until you've completely repaid your loan.
  • Unmatched benefits- Community lenders put people over profits and offer unique benefits like cosigner release after 12 on-time payments, interest only repayment options to keep monthly payments low, the largest unemployment protection period in the market, and more.

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#2 View More Details

Offers unemployment protection and career/coaching/networking

  • APR: 2.490% - 8.074%
  • Minimum credit score: 650
  • Refinance up to 100% of student debt
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Visit SoFi View Loan Disclosure

SoFi, which stands for “Social Finance,” was created by a group of Stanford business students who found themselves with a mountain of debt after graduation. They set out to change the student loan industry and help borrowers like themselves to get lower interest rates. SoFi has some of the lowest interest rates and, unlike the other lenders we reviewed, it has no maximum amount you can finance. However, Nevada residents can’t currently refinance with SoFi. Minimum loan balances are higher in Arizona, Massachusetts and Pennsylvania due to state laws. Additional state restrictions may apply.

SoFi Student Loan Refinancing Review

  • Low interest rates - For well-qualified borrowers, SoFi offers some of the lowest rates we have found.
  • Strong customer service - It has more than 350 customer service reps available to help applicants through process.
  • Career coaching and networking - Perks include career services representatives who can help you find a job or negotiate a higher salary. SoFi also hosts networking events, happy hours and educational lectures on topics like buying a home in major cities around the country.
  • Unemployment protection - Borrowers who lose their jobs through no fault of their own may apply for Unemployment Protection. If approved, SoFi will suspend their monthly SoFi loan payments and provide job placement assistance during the forbearance period. These benefits are offered in three month increments, and are capped at 12 months, in aggregate, over the life of the loan. Note that interest will still accrue while loans are in forbearance.

Find out what interest rate SoFi can offer you here.

#3 View More Details

For every loan they fund, they contribute to the education of a child in need

  • APR: 2.48% - 6.25%
  • Minimum credit score: 660
  • Refinance up to $500K
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Visit CommonBond View Loan Disclosure

CommonBond was founded in 2011 by three MBA graduates from the University of Pennsylvania’s Wharton School who wanted to help their peers escape from high-interest student loan debt. Its original focus was on grad students, but it has since expanded to cover undergrads as well.

Of all the companies we reviewed, CommonBond has some of the best customer service. The company prides itself on being easy to reach by email, phone, or live chat. It offers networking events, expert panels, insider newsletters, and even has a program help borrowers who lose their jobs to find new ones. CommonBond also makes you feel good about choosing to refinance with them by donating money to an education nonprofit for each loan they write.

CommonBond Student Loan Refinance review

  • Unemployment protections - If you lose your job or decide to go back to school, you can delay your payments for up to 24 months.
  • Social promise - For every loan they fund, they also contribute to the education of a child in need.
  • Hybrid loan option - Offerings include a 10-year hybrid loan with fixed interest for the first five years, and variable interest for the final five.
  • Referral bonus - For every friend you refer who refinances their loans with CommonBond, you’ll earn a $200 cash bonus.
  • Qualification - Borrowers must have graduated at least 2 years prior if they want to apply without a co-signer. And borrowers in 6 states – Idaho, Louisiana, Mississippi, Nevada, South Dakota, and Vermont – cannot currently refinance through CommonBond.

Get a personalized review of your refinancing options with CommonBond today.

#4 View More Details

Earnest empowers people with the financial captial they need to live better lives.

  • APR: 2.49% - 7.89%
  • Minimum credit score: 650
  • Refinance up to $500K
View More Details
Visit Earnest View Loan Disclosure

Using technology, data, and design to build affordable products, Earnest's lending products are built for a new generation seeking to reach life's milestones. The company understands every applicant's unique financial story to offer the lowest possible rates and radically flexible loan options for living life.

  • Commitment-free 2 minute rate check
  • Client Happiness can be reached via in app messaging, email, and phone 
  • No fees for origination, prepayment, or loan disbursement
  • Flexible terms let you pick your exact monthly payment or switch between fixed and variable rates
  • Skip a payment and make it up later
  • Online dashboard is designed to make it easy to apply for and manage your loan

Click here to apply with Earnest and to see how much you can save.

#5 View More Details

Operates in all 50 states; 2nd largest student loan refinancing lender

  • APR: 2.50% - 7.02%
  • Minimum credit score: 660
  • No refinancing amount maximum
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Visit Laurel Road View Loan Disclosure

Laurel Road is a national online lender with customers in all 50 states, the District of Columbia, and Puerto Rico. Many of our non-bank competitors are not able to lend in all 50 states.Laurel Road has grown to be the second largest player in the student loan refinancing space in large part because of our reputation as the go-to low rate provider.

Laurel Road Student Loan Refinance Review

  • National reach - Online lender that is available in all 50 US states, the District of Columbia and Puerto Rico.
  • No fees & the lowest rates in the space - Laurel Road is the most transparent about the rates they provide customers, and offer the lowest rates where it counts. Our customers will save more than $20,000 over the life of their loans on average. 
  • Customer service reputation - Laurel Road's customer service representatives are no rookies. With 19 years of experience on average, Laurel Road’s Customer Service team delivers an experience that is best in the industry. They work to build meaningful, life-long relationships with our valued customers to improve their overall financial wellness.
  • The stability & security of a bank - They are a division of Darien Rowayton Bank, a stable and secure FDIC-insured bank, regulated by the FDIC and the Connecticut Department of Banking.

Get your personalized, pre-approved rates in less than 5 minutes.

#6 View More Details

Special offers for medical resident and fellow refinance products

  • APR: 3.10% - 7.84%
  • Minimum credit score: 670 w/cosigner
  • Refinance up to $350K
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Visit Splash View Loan Disclosure

Splash Financial is a leader in student loan refinancing with new rates as low as 3.25% fixed APR which can save you tens of thousands of dollars over the life of your loans. No application or origination fees and no prepayment penalties. Splash Financial is in all 50 states and is intensely focused on customer service. Splash Financial is also one of the few companies that offers a great medical resident and fellow refinance product. You can check your rate with Splash in just minutes.

  • Low interest rates – especially for graduate students
  • No application or origination fees. No prepayment penalties.
  • Co-signer release program - you can apply for a cosigner release form your loan after 12 months of on-time payments
  • Specialty product for doctors in training with low monthly payment

Click here to see more of Splash's offerings and to see how you can save money.

Comments

I reduced my student loan payment by $152 per month, by refinancing thru Nitro:

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