3 Factors that Contribute to Fluctuating Interest Rates on Student Loans

Your personal credit score is only one factor that will contribute to fluctuating interest rates on your student loan. There are other factors that are beyond your control that will also have an effect on the rates you receive. If you have an adjustable rate loan, these factors will also cause your existing rate to adjust. In a recession, interest rates typically go down. When the economy is strong, interest rates generally go up. However, there are other factors pushing rates in both directions at any given time.

National Prime Interest Rate

The main reason rates drop in a recession is because the national prime rate goes down. This rate is set by the Federal Reserve, and it may be adjusted at any time. This means the Fed can respond in real time to changes in the need for a lower or higher interest rate. The Fed aims to curb inflation and expand lending in a recession by lowering the interest rate. The Fed Rate is the interest rate that lending institutions charge each other to borrower money and will directly affect your loan. The cheaper these loans are on the broader market, the cheaper they will be for you personally because the cheaper rates banks have to pay, the cheaper rate you pay.

National Credit Market

At the same time, the Fed is lowering interest rates; the national credit market will typically become weaker in a recession, leading to higher rates. These two forces work in opposing directions. A weak credit market is the product of a number of failed loans. In a recession, borrowers default in high numbers. Foreclosures, bankruptcies, and defaults on large commercial loans all result in a weakened financial market. Banks have less money to lend. They also become risk-averse because they see investments and risks failing to pay off. In the end, you will have to pay more to get the banks to lend you money. As a rule, you will be most subject to these market fluctuations if you have bad credit. If you have good credit, the weak market will usually not fully counteract a lower prime rate, and you will still be able to get a good interest quote. A high risk borrower will not benefit from lower prime rates because the status of the market will affect their loans more.

Government Incentives

The federal government often provides incentives for students in need of financing for college or graduate school. In a recession, the government often extends these offers to encourage more growth and overcome the economic gap in other funding sources. Borrowers with short credit histories or low asset bases, such as students, will find specific programs aimed at financing their education. You can locate federal loan programs through your college or university. You will need to know the exact cost of your education before funding can be approved. In fact, the government will require you to continually apply for loans in your time at school. Changes in the cost of education or changes in the federal agenda will mean your loan amounts are not guaranteed for all four years. The interest rate on these loans will be much lower than a private loan rate, making the extra effort worth the payoff in most cases.


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