Student Loan Interest Rates Vary According to Credit History

As with any loan, your student loan interest rates vary depending on your credit history.  A credit history is a record of your past debts and whether you made payments on time. Lenders evaluate your credit history to determine the risk of default. If you have a history of missing payments on other debts, lenders will consider you a risky candidate for a loan, and will charge you a higher interest rate to offset this risk. Or, if your credit history is particularly poor, a lender may reject your loan altogether. 

How Does My Credit History Affect Student Loan Interest Rates? 

Lenders offering private student loans base interest rates on a standard rate known as the London Interbank Offered Rate, or LIBOR.  The LIBOR is the interest rate which different banks in the United States, London, and other countries charge each other for short-term loans.  The exact LIBOR rate changes as the international economy does; typically your lender will use the LIBOR rate that is effective on the day of your application.

To calculate your interest rate, your lender starts with the LIBOR, and then adds more percentage points; the number of points that are added to the rate are based on your credit score. Typically, if you have a credit score of 770 or better, your lender will add 2.3 percentage points to the LIBOR rate to calculate your interest rate.  However, if your credit score is between 740 and 770, your lender will add 2.75 percent to the LIBOR instead.  A credit score between 690 and 739 means lenders will add 3.95 percent to your interest.  If your credit score is even lower than 690, a lender will add as much as 6.45 to your interest rate. 

These higher interest rates have a serious impact on the total cost of your loan.  For example, suppose you are borrowing $10,000, and the LIBOR is 1%. If you have a high credit score, and your lender adds 2.3 percentage points to the LIBOR, your total interest rate would only be 3.3%, and you would only pay $330 in interest.  However, if you have a low credit score, and your lender adds 6.45% to your interest rate, your total interest rate would be 7.45%, and you would pay $745 in interest on that same $10,000 loan. 

Does My Credit History Affect Rates On All My Loans?

Your credit history will only affect private student loan interest rates. Federal student loans do not take your credit history into account, and use other means to calculate your interest rates. So your credit history will not affect the interest rates on any of your federal student loans. PLUS loans, loans offered to parents to help pay for a student's education, however, also evaluate credit risk. 


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