Understanding Interest Rates for International Student Loans
December 13th, 2012 by Jennifer Frankel
It comes as no surprise that international students are interested in, well, interest. After all, interest – broadly defined as the money above and beyond the principal (original amount of the loan) paid to the lender in exchange for borrowing money – represents a significant financial burden for any kind of loan. That burden, however, can be quite different for international students than it is for domestic students.
Varying international student loan interest rates are one of the key reasons for this. Indeed, while the interest rates on federal student loans are fixed by law, such loans are usually inaccessible to foreign students studying abroad in the United States. Fortunately, in addition to self-financing through personal savings and scholarships, international students can turn to international student loans when financing the goal of higher education. Unlike federal student loans, however, the international student loan interest rates are not fixed. Instead, a number of factors, when taken together, determine the interest rate on a private loan.
While interest on private loans is still calculated as a percentage of the unpaid principal amount borrowed, private loans start by using standard indexes (such as the Prime Rate or LIBOR) to calculate interest rates. The index a given loan uses is clearly outlined in a loan’s Master Promissory Note. From this standard basis, however, individual factors, including a borrower’s credit score, their cosigner’s credit score, the college or university in question, and the loan repayment rate may all influence a borrower’s interest rate. Thus an international student loan interest rate is made up of a number of unique factors that vary from student to student. Nevertheless, each aspect that goes into these calculations should be outlined in a loan’s Master Promissory Note or disclosure statement. It is therefore crucial that potential borrower read all of their loan documentation carefully – knowledge, after all, is power.