How College Loan Interest Rates are Established

Private college loans have variable interest rates based on either the Prime or LIBOR (London Interbank Offered Rate) index. What does this mean?

First, the interest rates on these loans fluctuate – rise or fall – in line with their relative index, Prime or LIBOR. As rates change, your monthly college loan payment will increase or decrease accordingly. To understand the frequency at which your interest rate is adjusted (i.e., monthly or quarterly), review your loan documents.

Secondly, it's important to understand that the Prime or LIBOR rate is not all that matters. Don't focus solely on the index because the interest rate you will pay on your college loan is the value of the index plus a margin. For example:

LIBOR (%) + Margin (%) = Interest Rate (%)

Since private college loans are credit-based, the range for the margin varies. Individuals with an excellent credit history will generally receive a lower margin, resulting in a lower interest rate than those with less-than-perfect credit.