Here's a Brief Primer on Fixed-Rate Private Student Loans

The number of private lenders—such as Wells Fargo, U.S. Bank, and Charter One—offering fixed-rate student loans has nearly doubled over the past year to about a dozen. There is little doubt that other banks will jump in soon with their own offerings.

If you do have to take out private loans, it's probably a good idea to compare the drawbacks and benefits of fixed versus variable rate private loans and, since we've been getting questions about this change, we are going to review some of the basics here.

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But let's just state this upfront: You should still maximize your federal student loans before taking out private loans because they have competitive rates and more importantly, offer protections for borrowers that private loans lack. We know we say that a lot, but here's a cautionary tale that illustrates the difficulty of repaying private loans and how they can impact a person's life.

And if you're curious about what can be done about students taking on private student loans before exhausting their federal loans, The Project On Student Debt's excellent publication, Critical Choices: How Colleges Can Help Students & Families Make Better Decisions about Private Loans, is well worth reading, as is this blog post from Higher Ed Watch.

In the meantime, let's take a look at the interest rates for a variety of federal student loans:

• Perkins loans: 5 percent;

• Direct subsidized Stafford loans: 3.4 percent for loans first disbursed on or after July 1, 2011, and before July 1, 2012; 6.8 percent for loans first disbursed on or after July 1, 2012;

• Direct unsubsidized Stafford loans: 6.8 percent;

• Direct PLUS loans (for parents and graduate and professional degree students): 7.9 percent;

• Direct consolidation loans: the fixed rate is based on the weighted average of the interest rates on the loans being consolidated rounded up to the nearest one eighth of 1 percent but it cannot exceed 8.25 percent.

By the way, you can find all this information and much more in the Department of Education's excellent 2011-2012 Guide to Federal Student Aid.

[Read about a new report on college student debt.]

Now, here's a look at the interest rates offered by some private lenders:

• Wells Fargo: a fixed rate ranging from 7.75 percent to 16.25 percent and variable rates ranging from 3.5 percent to 11.99 percent depending on your credit. (To view today's rates, visit this page and click on "View Rates.")

• U.S. Bank: a fixed rate of 7.99 percent and variable rates ranging from 3.45 percent to 10.95 percent;

• Charter One: a fixed rate ranging from 6.61 percent to 11.76 percent and variable rates ranging from 2.94 percent to 9.49 percent, again depending on your credit.

As you can see, unless you have excellent credit and are willing to risk taking on a variable rate loan with no borrower protections, the interest rates for private loans are generally higher than those for federal loans.

Not surprisingly, interest rates on variable rate private loans tend to be lower than the rates on private fixed interest rates. So why would you choose a fixed rate loan over a lower, variable rate?

[Learn what President Obama's student loan plan means for you.]

First, let's admit that none of us really know what interest rates will be like over the long term (if you do know, drop out of school and get a job in finance ASAP), although the Federal Reserve did recently announce it intends to keep interest rates low until at least mid-2013. So if you are choosing among private loans, the decision basically comes down to the length of time you will be repaying your loan and your appetite for risk.

For example, if you are going to be paying back your loans for a number of years a long time and you prefer knowing what you will have to pay, a fixed interest loan may be for you. On the other hand, if you are minimizing your expenses and limiting your debt so that you can pay back your loans quickly, you may want to take advantage of the lower interest rates currently offered by the variable rate loans. Just keep in mind that if it takes you longer than you expect to pay off your loans and interest rates rise steeply, you may end up paying much more and struggling to make your monthly payments.

One last note: the examples we used were done at random and were not intended to be a comparison between private lenders or an endorsement of any class or category of private loans. If you do want to take a look at some private loan comparisons, FinAid.org is a good place to start. Ultimately, however, there is no substitute for taking the time to make your own comparisons and drawing your own conclusions about what is best for you.

Don't forget to sign up for our upcoming free student debt relief webinars on Thursday, December 1, or Friday, December 16, where we'll go into the details of earning Public Service Loan Forgiveness on your eligible federal student loans. And make sure you're following us on Twitter @EJW_org #studentdebthelp and visiting our Facebook page to get the latest educational debt information.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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