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How to Know If You Are Overpaying on Your Student Loans

03/25/2015 09:27 pm ET | Updated May 25, 2015

No one likes paying their student loans, but many people come to enjoy it even less once they realize that they are overpaying by thousands of dollars each year. Student loans come in a variety of shapes and sizes. Many graduates do not graduate with just one student loan, but with multiple loans, each with its own interest rate, repayment period and fine print. Understanding the types of loans you have and comparing them against the other options that exist can help you determine if you are paying too much.

Why do interest rates differ?

Interest rates are dictated by market conditions, and as a result they can vary from year to year. In the past five years, federal student loan interest rates have ranged from a high of 8.5 percent, before the financial crisis, to as low as 3.4 percent. For example, if you first received a Direct Subsidized undergraduate loan in 2008, it came at a fixed interest rate of 6.8 percent, whereas if you had first received that same loan in 2014, it would have been at a fixed rate of 3.86 percent. Graduate federal student loans also tend to have higher interest rates compared to undergraduate loans. An Unsubsidized Direct graduate loan in 2014 had an interest rate 5.41 percent.

What factors determine my interest rate?

Federal student loan interest rates are one size fits all: everyone gets the same rate regardless of his or her credit and financial history. However, many graduates may also take out private loans to finance the remaining portion of their education. Private loans often have higher interest rates while in school because of your limited financial and employment history. However, once you graduate and land a steady job, you immediately become a stronger candidate and can often be rewarded with a more competitive interest rate.

Are my interest rates competitive?

At Credible, we have a unique view of the student loan market and a deep understanding of the interest rates offered to graduates over the past 15 years. We have partnered with the majority of lenders in the market, and we know what student loan interest rates are competitive: a number of lenders offer variable interest rates as low as 1.92 percent and fixed rates as low as 3.95 percent. If you have graduated in the past 10 years and have stable employment with good income, you could probably reduce your interest rate by refinancing your student loans.

It is of paramount importance to note that refinancing federal student loans comes with a number of trade offs, such as eligibility for income-driven repayment plans and forgiveness options. It is important for graduates to do their homework and speak with their existing and potential lenders about the terms and conditions to get a complete picture of the decision they are making. However, for many student loan holders, refinancing is a viable option that can offer substantial lifetime savings.

So, are you overpaying on your student loans? Find out what your options are, and see how competitive your rates are with what's currently offered on the market. In less than 30 seconds, you can see how your loans stack up using Credible's comparison tool.

Visit studentaid.ed.gov for more information regarding your federal loan options.

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