Applying for graduate school is always exciting — until you have to figure out how to pay for it. All of a sudden, you’re inundated with percentages and big numbers when you really just want to be thinking about your studies. It’s important to get your loans right, though, as interest rate on graduate school loans can play a big role in overall affordability.
Let’s look at how graduate student loan interest rates are determined.
What Are Interest Rates and Why Do They Matter?
First though, it’s important to understand the concept of interest rates and why they’re important to your financial health. At their most basic level, interest rates determine how much you’ll have to pay back in addition to the principal amount of a loan.
Most of the time, interest rates are represented as a percentage, and referred to as an annual percentage rate (APR). Essentially, APR determines the amount of interest that is charged based on the principal amount remaining on a loan. If a loan has a $100 balance with a 10 percent APR, you’ll be paying $10 in interest on it that year.
It should be pretty clear, then, why interest rates matter. They can make a huge difference in the amount you’ll actually have to repay over the course of a loan. Finding loans that offer the most competitive interest rates can make things vastly more affordable.
This is why you need to pay attention to interest rates when applying for grad student loans.
How Interest Rates Are Determined
Now that you have a better understanding of the concept, let’s look at how graduate student loan interest rates are determined. First, it’s critical to note the way interest rates and eligibility are decided upon differs between federal and private loans. This is because the government’s motivations for providing student loan financing differ from those of private lenders.
When it comes to getting a graduate student loan from the federal government, you’re going to have two main options: direct unsubsidized loans and Grad PLUS loans. There are a couple nice things about getting federal loans. First, your rate is going to be the same as everyone else’s.
Whatever the standard rate is will be the rate you receive, regardless of credit. And furthermore, it’s typically not impossible for people to get federal loans without great credit.Those with collections, bankruptcy, or other negative credit marks can still receive federal loans by getting an “endorser,” which is someone to co-sign the loanwho has better credit.
If you’re like most people, you probably know and care very little about 10-year treasury rates. This is, however, extremely important when a lending institution is determining interest rates, as treasuries are typically regarded as one of the safest yield-bearing investments. Federal graduate student loans use this rate, plus an additional, fixed rate of interest, to determine the interest rate of loans for that given year.
The Congressional Budget Office has set these as its guidelines for federal graduate student loans:
- Direct unsubsidized loans: 10-year Treasury + 3.60%, with a 9.50% maximum
- Grad PLUS loans: 10-year Treasury + 4.60%, with a 10.50% maximum
Private loans are a little bit different. Since these are private institutions, they get to determine how they want to adjust interest rates to reflect perceived lending risks. For this reason, there can be a much great range of offers from private lenders, whereas you’ll only get single flat options through the government.
Being able to find the best deal is crucial to benefiting from a private grad school loan. Companies like Juno are making this easier for students by having lenders submit bids for their group members’ business. By negotiating with a wide pool of lending companies, Juno can get its users the best possible private loan terms—often better than what’s offered by federal loans.
Interest rates are arguably the most important part of a loan. The difference between a few percentage points might seem arbitrary, but can actually heavily shift the scales between being affordable and out of reach. A lower interest rate will help you pay back less on your education expenses and instead put that money toward building your future.