How Are Private Student Loan Interest Rates Determined?

When it comes to paying for college, interest rates can seem difficult to understand. There are two different types of interest rates, which change according to outside factors, like government guidelines, and factors you control, like your credit score.

In order to understand how private student loan interest rates are determined and how they affect your private student loans, you need to know the difference between fixed and variable interest rates. When you have a handle on interest, you’ll be able to choose the specific type of loan and terms that work for you. Use this article to understand how private student loan interest rates are calculated and what to expect from your loans and lenders.

What are interest rates?

Interest is calculated as a percentage of your total (or principal) loan amount. It’s what it costs to borrow money. Interest accrues daily.

But remember that the rate isn’t the only factor that affects the total cost of your loan or monthly payments. Federal student loans only offer fixed interest rates that are determined at the beginning of each school year. But when choosing a private student loan, you’ll be able to choose between a fixed or variable interest rate.

Fixed vs. Variable Interest Rates

A fixed interest rate will stay the same while you’re repaying your loan, so your monthly payments won’t change. Your lender will determine your interest rate when you apply for the loan. Private lenders and the federal government have different methods for determining the fixed rate (more on that below). Some people prefer a fixed interest rate so they know exactly what their payments will be for the life of the loan. If you plan on a longer repayment term, it may make sense to choose a fixed private student loan interest rate, so it doesn’t have a chance to increase as time goes on.

A variable interest rate fluctuates with the market index. This means that your minimum monthly payments are likely to change during the repayment period. The starting variable private student loan interest rate will usually be lower than the offered fixed rate. It also has the possibility of decreasing or increasing over time. If you plan on paying off your loan quickly, it may make sense to opt for a variable loan, saving you interest costs during your repayment period.

Federal student loans only offer fixed rates, whereas private lenders may offer both fixed and variable rates. If you take out a private student loan, you should estimate how long it will take you to pay off your loan and carefully consider which private student loan interest rate type will likely cost the least overall.

Federal vs. Private Student Loan Interest Rates

Most students qualify for some sort of financial aid from the government usually in the form of federal student loans to help pay for college. Those types of loans are funded by the U.S. Department of Education and always have a fixed interest rate. Students may also opt for private student loans to cover the remaining costs, which come from private lenders like banks, credit unions, and online lenders. When choosing a loan and lender, you must first understand the difference between the two types.

Federal Student Loans

  • Apply using the Free Application for Federal Student Aid (FAFSA)
  • Government-funded
  • Flexible repayment options
  • Fixed interest rates

Federal student loans’ fixed interest rates are based on 10-year Treasury note rates, which are determined each May. The actual interest amounts include an add-on percentage depending on the loan type and your undergraduate or graduate status. Remember, that federal loan interest rates are established annually to determine the upcoming year’s rates. Once your rate is determined (according to the year you take it out), it will stay the same for the life of the loan.

Private Student Loans

  • Each lender requires their own application
  • Privately funded by banks, credit unions, and online lenders
  • Approval based on credit
  • Fixed and variable private student loan interest rate options

Private student loans come from lenders like banks, credit unions, and online lenders. Each lender determines the private student loan interest rate and loan terms based on market factors and the student (and cosigner) who is borrowing money. Unlike federal student loans, private lenders typically provide the option for variable interest rates, which fluctuate with the market index. Lenders use a benchmark index rate to guide their private student loan interest rates. The most common benchmark used to be the London Interbank Offered Rate (LIBOR), which will be retired by 2023. After that, most banks and lenders will adopt a new benchmark called SOFR, short for Secured Overnight Financing Rate. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and a more reliable index than LIBOR.

Private student lenders also evaluate your credit history and income when considering if you are approved for a student loan. Your credit score, income, and employment history will help lenders determine if you have the ability to pay back the loan on time. That’s why they always require a credit check and may also require a cosigner if your credit and income does not meet their requirements.

Need help? Use Our Student Loan Calculator

How to Get the Lowest Private Student Loan Interests Rates

As you can see, many private student loan interest rates depend on a few different factors. You’re probably still wondering how you can get the lowest possible rate. Here are two other ways to help score a lower rate.

Auto-Pay Discounts

Some private lenders like College Ave Student Loans offer a 0.25% rate discount when you sign up for automatic payments. These payments are scheduled to be deducted electronically from your bank account on the same day every month, so you never miss a deadline. This agreed-upon accountability ensures you make your payments on time, preventing any late fees… Plus, you get a discount on your interest rate!


If you already have student loans, another way to reduce your rate is by refinancing them. Refinancing is when you take out a new loan that pays off some or all of your existing student loans, which might be a combination of federal and private student loans. it’s very important to consider whether you’ll lose any important benefits by refinancing any federal loans. Federal loans carry special benefits, such as public service forgiveness and an income-driven repayment option, that are not typically available on private loans. Make sure you know what those benefits are, and if you are likely to use them before you commit to refinancing your student loan debt.

Learn More About Refinancing vs. Consolidating

With refinancing, you’re then responsible for paying just one monthly payment toward the new loan, rather than across multiple loans. The new loan typically has a lower private student loan interest rate than what you were paying for each individually.

Learn More About Refinancing Student Loans

Next Steps

There are many variables that affect private student loan interest rates. From market factors to rate choice and your creditworthiness, many ingredients make up the interest rates you see advertised across private lenders. Click here to learn more about different types of loans and private student loan interest rates we offer.

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Undergraduate Student Loans
Graduate Student Loans
Parent Loans


Updated on 09/13/2022


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