Federal student loan interest rates are set by Congress, and fixed. Private student loans usually have substantially higher interest rates, and the rates fluctuate depending on the financial markets. Some private loans disguise the true cost of borrowing by requiring substantial up-front origination "fees", which enable deceptively lower interest rates to be offered. Interest rates also vary depending on the applicant's credit history.
Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an overhead charge. Because private loans are based on the credit history of the applicant, the overhead charge varies. Students and families with excellent credit generally receive lower rates and smaller loan origination fees than those with poorer credit histories. Money paid toward interest is now tax deductible. However, lenders rarely give complete details of the terms of the private student loan until after the student submits an application, in part because this helps prevent comparisons based on cost. For example, many lenders only advertise the lowest interest rate they charge (for good credit borrowers). Borrowers with bad credit can expect interest rates that are as much as 6% higher, loan fees that are as much as 9% higher, and loan limits that are two-thirds lower than the advertised figures.