Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 2, 2012

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Borrowers eager to go to college often don’t think about the terms and conditions associated with their student loans. But if they can be convinced to pay attention to just one part, they should take a look at the interest rates offered. While interest rates can be hard to understand, it’s important to at least compare multiple student loan offers and select the opportunity that will prove be the cheapest over the duration of the loan.

How are Student Loan Interest Rates Determined?

Interest rates on college financing act a bit differently from rates offered on other types of common loans. Instead of fluctuating daily, most college financing rates remain stagnant for year-long stints or for the entire duration of loan itself.

There are four main factors that influence student loan rates:

  • Whether the rates are variable or fixed
  • The type of loan
  • The date the student loan was originated
  • Whether a student is financing undergraduate or graduate studies

Variable vs. Fixed

Like mortgage contracts, student loans can come with variable or fixed interest rates. Variable rates will fluctuate over time and change according to whatever index they’re tied to. Fixed rates are more stable and predictable, remaining the same throughout the lifetime of the financing.

According to American Student Assistance (ASA), most variable rate loans change on July 1 of every year.

Today, most federal student loans come with fixed rates, while most private loans come with variable rates.

It’s All in the Type

The type of financing originated plays a large part in what sort of rates will be offered. As previously stated, federal and private loans come with different terms.

Federal student loans are often set by federal law, and are free from fluctuating with a corresponding index. That hasn’t always been the case, but since 2006, most federal loan rates have been completely fixed.

Private lenders, on the other hand, favor variable rates. Since private lenders offer money that isn’t subsidized by the government or secured by taxpayers money (theoretically…) they offer variable rates that fluctuate year to year depending on how the economy is doing.

One Day May Offer Better Rates than the Next

Timing is also a factor in securing a certain interest rate. This is particularly true for federal student loans.

According to the ASA, all federal financing opportunities originated after July 1, 2006 have come with fixed interest rates. Since that date, with the exception of 2007, every single year has come with a decline in the interest rate. For instance, Stafford Loans started at a fixed 6.8 percent rate in 2006, and by 2011 that rate had dropped to 3.4 percent.

Likewise, private financing originated on a given day may come with a better rate than an opportunity offered another day.

Graduate or Undergraduate Studies

Finally, depending on what level of study a borrower is pursuing, interest rates may be different. For whatever reason, maybe due to the fact that further education is more specialized and, in the eyes of the government, more costly, graduate students tend to receive higher interest rates.

Undergraduate students, on the other hand, are afforded the luxury of low rate student loans—at least compared to their Master’s- or PhD-pursuing counterparts.