APR Vs. LIBOR Student Loans

Private student lending has increased dramatically since the inception of government financing for education. Before students consider any private funding, they must exhaust any and all government programs, including grants, scholarships, and work-study jobs. Private lenders, as a priority, make loans to make profits--not to educate the masses. Despite "teaser" rates, banks and finance companies seek profits first. In general, private lenders grant student loans based on APR, or fixed rates, and LIBOR, or adjustable rates.

APR v. LIBOR

APR stands for Annual Percentage Rate. LIBOR stands for London Interbank Offered Rate. The main difference is that in most cases, a loan with a predetermined APR will never adjust. A loan that uses the LIBOR to calculate rate can adjust regularly and dramatically. A LIBOR student loan can also be called an adjustable loan, depending on the language in the contract.

APR Loans, Advantages and Disadvantages

APR loans offer security, first and foremost. The rate is almost always locked in meaning payments will never adjust outside the range of your budget. This means that before you sign on for an APR loan, you can calculate exactly how much you'll be able to afford, and be confident in your ability to repay once you've signed the loan. However, APR loans will not take advantage of beneficial market conditions.

LIBOR Loans, Advantages and Disadvantages

Most LIBOR student loans are LIBOR plus a certain figure. For example, a typical LIBOR student loan will be LIBOR + 2.50 percent. The LIBOR rate adjusts daily and is based on the average rate at which all major competing UK banks lend to one another. As such, this rate is normally fairly low. Therefore, a LIBOR-based student loan will often be less costly than an APR loan. The problem, though, is that these loans could adjust to unwieldy rates, sparking massive defaults.

Choosing a Program

Savvy borrowers should look at a LIBOR trend before accepting a LIBOR-based student loan rate. The LIBOR is printed daily in the Wall Street Journal and online at Bankrate.com (see Resources). Borrowers should look at at least a five-year trend. The LIBOR tends to move with the economy--the rate goes up in times of economic sluggishness and vice versa. While it's impossible to determine the future condition of the economy, LIBOR-based rates are most secure in times of relative economic harmony.

The Fine Print

Make sure to review the fine print in the loan paperwork. Sometimes lenders add on fees and adjustable rate riders to loan documents--conditions that could prove disastrous for borrowers. Make sure to review the final numbers with a trusted advisor, like an accountant or attorney.

References

• FinAid.org; Private Student Loans
• Sallie Mae; Student loan interest rates and fees
• Lending Tree; Comparing Student Loans

Resources

• Bankrate; LIBOR, other interest rate indexes