Low-Interest Student Loans: Compare Your Options in 2019

Most people need to borrow money to pay for the costs of college or graduate school. And whenever you borrow money — for school or any other reason — it’s always important to keep your interest rate as low as possible.

Students have two primary choices for securing student loans: federal student loans and private student loans. Federal loans have standardized interest rates, which are generally lower than private loan rates. In some cases, the interest is subsidized, which means the government pays interest while you’re in school and when your loans are in deferment. 

You should always borrow the maximum you can in federal student loans because they can be more affordable due to lower interest rates. They also offer major borrower benefits.

Federal student loans often don’t provide enough money to pay for all the costs of higher education, so you may need private student loans to pay the difference. There’s no standard private student loan interest rate, so you’ll need to shop around to find the most affordable loan for your situation.

On this page:

• Why is it Important to Find Low-Interest Student Loans?
• Low-Interest Federal Student Loans
• Private Student Loans With Low Rates

Why is it Important to Find Low-Interest Student Loans?

When shopping for student loans, it’s important to look for the lowest interest rate you can find to lower the cost of borrowing. The higher your interest rate, the higher your monthly loan payment will be — and the more you pay in interest, the more you’ll pay over the life of the loan.

In 2016, the Congressional Budget Office estimated the federal government stood to make as much as $1.6 billion in profit from student loans. Many politicians have called for reducing the federal loan interest rates so the government doesn’t make money off indebted students. Private student loans are also made by for-profit institutions, and these lenders make money in the form of interest charges.

You don’t want to pay more to the government or your private lender than necessary. Make sure to exhaust all your options for low interest rate student loans from the federal government first and then look for a private lender with the lowest possible interest rate to fill your funding gap.

Low-Interest Federal Student Loans

Federal student loan rates are standardized by the government each school year and aren’t based on your credit score, so there’s no need to shop around. Loan amounts are limited per academic year, and your school determines the loan types you’re eligible to receive. Rates, which are fixed for the life of the loan, vary by loan type (e.g. Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans):

Direct Subsidized Loans

Direct Subsidized Loans are available only to undergraduate students with demonstrated financial need as determined by the Free Application for Federal Student Aid (FAFSA). The interest rate for loans disbursed on or after July 1, 2018, and before July 1, 2019, is 5.05%.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to both undergraduate and graduate students. You don’t have to demonstrate financial need to be eligible for Direct Unsubsidized Loans.

The interest rate for Direct Unsubsidized Loans for undergraduates is 5.05%, while the rate for graduate or professional students is 6.6%. This is for loans disbursed on or after July 1, 2018, and before July 1, 2019.

Direct PLUS Loans

Direct PLUS Loans are available to parents of students as well as graduate or professional students. Unlike Direct Subsidized and Direct Unsubsidized Loans, which are available regardless of your credit score, approval is based on your credit history and other factors.

The interest rate for Direct PLUS Loans disbursed on or after July 1, 2018, and before July 1, 2019, is 7.6%.

Private Student Loans With Low Rates

Private student loans typically have higher interest rates than federal student loans. Rates vary by lender based on the following factors:

• Your credit score and credit history: People with better credit qualify for a lower interest rate.
• Proof of sufficient income to repay the loan: If you have a higher income, you’re considered a less risky borrower.
• The amount you borrow: You may pay a higher interest rate to borrow a larger amount of money because the lender is taking on a bigger risk.  
• Whether you choose a fixed-rate or a variable-rate loan: Variable rate loans typically start lower than fixed-rate loans but can move up or down based on the financial index they’re tied to. Variable-rate loans are riskier because your payments could increase during repayment.
• Your loan repayment term: Longer repayment plans usually mean higher interest rates because you’re taking more time to pay back the funds.

The federal government, on the other hand, doesn’t charge different rates based on credit score, income, or the amount you borrow. All federal loans offer fixed interest rates.

With federal student loans, you can change your repayment terms over time as your financial situation changes, unlike with private student loans where you set your timeline and terms for repayment upfront.

How to Find Private Low-Interest Student Loans

Here’s how to make sure you’re getting the most affordable private loan at the lowest possible interest rate:

• Shop around: Since rates vary from one private loan lender to another, it’s imperative to compare quotes and loan offers. Look for lenders that provide quotes with a soft credit pull so as to minimize the number of hard inquiries on your credit report. Include online lenders, traditional banks, and credit unions in your search.
• Consider a cosigner: If you don’t have a steady income or an established credit history, see if you can get a family member or friend to cosign for your loan. Cosigning reduces the risk to the lender because your cosigner is legally responsible for paying back the loan along with you. You may be able to get a much better rate with a cosigner, especially if they have good or excellent credit.
• Compare apples-to-apples: Make sure you understand each loan offer and compare loan terms closely. A loan with a variable interest rate may appear to be cheaper than one that comes with a fixed interest rate, but you’re taking on more risk — both your rate and monthly payment could increase in repayment and throw your budget out of whack.

You don’t have to worry about these things with federal student loans, which offer standard rates regardless of your credit.

Private Lenders With Low-Interest Student Loans

There are many private lenders that offer low-interest loan programs. Oftentimes, you can enjoy an interest rate reduction if you opt for autopay. Here are some lenders worth considering:

Bottom Line

Choosing the right student loan lender is key to keeping your borrowing costs as affordable as possible. Remember, always exhaust your federal student loan options (and other types of financial aid, including scholarships and grants) first before considering private student loan lenders.

This will reduce your costs over time and provide important borrower protections (including loan forgiveness programs and the ability to place your payments in forbearance or deferment) and more flexible repayment options.

Discover Student Loan Disclosures

1. Lowest rates shown ARE FOR THE UNDERGRADUATE LOAN AND include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments. The interest rate ranges represent the lowest INTEREST RATE OFFERED ON THE DISCOVER UNDERGRADUATE LOAN and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.25% as of October 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please click here for more information about interest rates.

View specific private student loan disclosures directly from Discover Student Loans here.