If you’re a student loan borrower, you’ve wondered about how your credit score impacts your interest rate. Your credit score is an essential factor in many areas of life, so it makes sense that it can also impact your student loans. So it’s important to understand how these two things are related to ensuring you’re getting the best terms possible on your education financing.
Why Student Loan Interest Rates Matter
Student loan interest rates are important because they can impact your finances for years to come. For example, if you have high student loan debt, the interest rate on those loans will significantly affect how much money you pay back over time.
For example: if two people borrow $10,000 at 6% and 3%, respectively–and both pay off their loans over 10 years–the person with a higher rate would end up paying $2,200 more than the person with a lower rate ($11,300 vs. $9,100).
Average Student Loan Interest Rates
When it comes to an average student loan interest rate, the average interest rate is 8.43%. This is lower than the average car loan (13%) and mortgage rates (4%-6%). That’s because lenders know that students cannot pay off their debt quickly and will likely be paying back their loans for decades. Lantern by SoFi advisors says, “The interest on student loans in the last few years has declined substantially.”
But what if you had a credit score of 700? Then your student loan interest rate could be as low as 6%. However, if your score were below 600 or even in the 500s–it wouldn’t matter how high your GPA was; lenders would still consider you too risky for them to lend money at an affordable rate.
How Credit Scores and Interest Rates are Related
Credit scores are used to determine interest rates for student loans. Interest rates are based on credit scores, which means that if you have a low score, your rate will be higher than someone with a higher score.
Creditworthiness is determined by looking at factors like payment history and debt-to-income ratio (your debt divided by your income). A person making payments on time has demonstrated their ability to repay their debts; therefore, they are more likely to repay their student loans as promised.
How to Get the Best Student Loan Interest Rate
If you want to get the best student loan interest rate, building your credit score is essential. A good way to do this is by opening a credit card and using it responsibly. Pay off your balance in full each month, and make sure that there’s enough money in your bank account when the bill comes due so that there are no late payments on your record.
Once you’ve built up a solid history of responsible use of credit cards or loans, consider applying for student loans with a lender who offers fixed rates (as opposed to variable rates).
As you can see, there is much to understand about student loan interest rates. This guide must have helped you better understand what factors into them and how they work! If you have any other questions or concerns about your own student loans, don’t hesitate to reach out–experts are here for you.