Interest Rates Explained

Lenders use various indexes upon which to base the interest rate they will charge for a particular alternative loan. The main indexes used for private educational loans are: Prime, Treasury Bill and Libor. It is difficult to compare actual interest rates for various alternative loan programs because the particular rate charged to a given person will depend upon the rate on the particular day they initiate the loan. For a precise determination of the interest rate on a given loan at a given point in time, it is necessary to contact the lender directly. Another issue is that lenders differ as to when they update their rates (daily, weekly, once a month, or irregularly based upon other factors). Some use an average rate while others pick a rate at a point in time.

You may view the current Prime, Treasury Bill, and Libor rates on the Banxquote Banking and Finance Center Money page on daily money rates. The Wall Street Journal and Bloomberg, also provide daily listings of the current interest rates.

PRIME: Lenders may choose to use a Prime rate based upon the predominant rate published by The Wall Street Journal (which is based upon a survey of 30 banks).

TREASURY BILL: Lenders may utilize a rate based on treasury bill notes made by the U.S. government in order to pay for the national debt and other expenses. Commonly called T-bills, they come in denominations of 3 months (sometimes referred to as 91-day or 13 week T-bills), 6 months, and 1 year (sometimes referred to as 52 week T-bills). The 3- and 6-month T-bills are auctioned every Monday and the 1-year T-bills are auctioned on Tuesday. The resulting figures are released to the public the next day. These indexes have also both a weekly and a monthly value.

LIBOR: A third rate utilized by some lenders is the LIBOR (London InterBank Offered Rates), the average interest rates paid on deposits of U.S. dollars in the London market. LIBOR is the standard financial index used in the U.S. capital markets.

CREDIT TIER: If lenders offer loans based on a credit tier, then the interest rates and fees are charged based on your credit rating and, if you have a cosigner, it will also include your cosigner’s credit rating (excellent, good, or fair). For example, if your credit is considered “fair” but you have a cosigner who has “excellent” credit, your rates and fees could fall within the “good” credit tier.