Federally backed loans- those which require an applicant to complete a FAFSA- are widely accepted to have the best interest rates. Interest rates on federal loans are fixed to a nationally-declared standard, and are provided directly through the U.S. Department of Education, and also include the Federal Parent PLUS and Stafford loans. These loans not only have interest rates of up to5 percent lower than private loans, but also come with benefits such as in-school grace periods.
Private student loans may have variable or fixed interest rates. Those with variable interest rates will have the interest rate pegged to an index such as the LIBOR or PRIME, as well as a margin, meaning that you may wind up paying a higher interest than is indicated on the contract you sign dueto a fluctuation in the market. As approval for private student loans are based on the credit score of a student or their cosigner, those with good credit scores will usually have better interest rates than those without.
A product of the advent of micro-finance and social lending, peer-to-peer loans are nontraditional, unsecured loans between individuals. These loans often have rates varying from 3.5 percent to as much as 24 percent, depending on the borrower's credit score. Websites such as Fynanz.com, GreenNote.com, Loanio.com, and Prosper.com assist loan applicants in finding suitable investors in the peer-to-peer loan process.
The interest rates of other financing options-- such as using credit cards to pay off tuition-- will likely either match or exceed those of more traditional student loans. Additionally, credit cards and short-term loans must also be repaid on a far shorter deadline.