Student Loan Interest Rates in December 2020

Student loans can be a useful way to fill in financial gaps when paying for higher education expenses. However, borrowing money for school comes at a cost, particularly in the form of interest rates.

According to a January 2020 national survey by the Bipartisan Policy Center, 55 percent of respondents said that they didn’t know the interest rate on their student loan.

Student loan interest rates determine how much money you’ll ultimately owe, so it’s important to know what your interest rate is and how it affects your loans. Here’s an overview of historic and current student loan rates and what you need to know about how student loan interest works.

Summary: The Bankrate student loan interest rate guide

• Current student loan interest rates
• How are student loan interest rates set?
• How has the coronavirus impacted student loan interest rates?
• What affects federal student loan rates?
• What affects private student loan rates?
• What affects refinancing interest rates?
• How to calculate student loan interest
• The difference between subsidized and unsubsidized student loans
• What is the difference between fixed and variable rates?
• How can I reduce my student loan interest rate?

Current student loan interest rates

Depending on the kind of student loan you have or are looking to get, interest rates vary. About 90 percent of borrowers have federal student loans, with interest rates ranging from 2.75 percent to 5.3 percent. Average private student loan interest rates, on the other hand, can range from 3.49 percent to 12.99 percent fixed and 1.09 percent to 11.98 percent variable. While federal student loan rates are the same for every borrower, private student loan rates vary widely based on the lender, the type of interest rate (fixed or variable) and the borrower's credit score.

Federal student loan interest rates

Source: The U.S. Department of Education

Private student loan rates (graduate and undergraduate)

*Includes autopay discount

Compare lenders: Private student loan rates

Refinance student loan interest rates

*Includes autopay discount

Compare lenders: Refinance student loan rates

Average student loan rates

Since federal student loan rates change periodically, a historical overview of federal loan rates is helpful to gauge average student loan rates.

Source: The Federal Register

How are student loan interest rates set?

Federal student loan interest rates and private student loan interest rates are closely related; when federal student loan rates drop, private student loan rates are likely to follow. This is because both types of loans tend to follow larger economic market trends.

How federal student loan interest rates are determined

Each spring, student loan interest rates are set by Congress based on the 10-year Treasury note yield. Federal loans are fixed, meaning that the rate will not fluctuate for the life of the loan. The interest rate you receive on a federal student loan is not determined by your credit score or financial history.

Rates differ between subsidized and unsubsidized loans. For federal subsidized loans, the government pays your interest charges for you while you’re in school at least half time, during your grace period and while you’re in deferment. The amount you’ll owe once your loan is in repayment will include only your original principal balance, loan fees and interest accrued moving forward.

With federal unsubsidized loans, interest charges accrue immediately after funds are disbursed. If you choose to hold off on making loan or interest-only payments until later, your student loan interest capitalizes.

As of Aug. 8, 2020, interest rates on federal student loans have been deferred through Dec. 31, 2020 due to impacts of the coronavirus.

How private student loan interest rates are determined

Private student loans are funded by banks, credit unions and lenders, so interest rates vary from lender to lender. Many private student loan lenders offer both fixed and variable rates, so your interest rate could fluctuate over the life of the loan if you choose a variable option.

Most student loan lenders set rates based on the LIBOR, or prime rate. However, while rates are tied to this benchmark, private lenders also determine your specific interest rate based on your financial profile.

Private student loan lenders typically evaluate your credit score, income and financial history to determine your interest rate. Generally, the better your financial health and credit score, the lower your interest rates will be. In order to access this information, many lenders will run a hard credit inquiry, which can knock your credit score down a few points.

How has the coronavirus affected student loan interest rates?

With the U.S. economy in a state of upheaval due to the coronavirus pandemic, interest rates have fallen to near-record lows for many financial products. Student loans are no exception; when the Fed cut interest rates in spring 2020, many private student loan companies lowered their interest rates on both fixed and variable products. Federal student loan rates for the 2020-21 school year were announced soon after, and they are some of the lowest rates in over a decade.

Thanks to the CARES Act and an executive order issued on Aug. 8, 2020, student loan interest payments on federal student loans are also waived through Dec. 31, 2020. During this time, private student loan rates have remained low.

What affects federal student loan interest rates?

Lawmakers meet every spring to determine federal student loan interest rates for the subsequent school year, meaning federal student loan interest rates change year by year. New rates are set every year on July 1 and apply to student loans disbursed through June 30 of the following year.

Even though federal student loan rates may change from year to year, you likely won't see any impact of fluctuating interest rates on your current federal loans, since they're under a fixed rate. The interest rate you received the year you took out your loan is the interest rate that you will have for the entirety of your loan.

What affects private student loan interest rates?

Since federal student loan interest rates are fixed, you likely won't feel the impact of the Federal Reserve raising or lowering rates on your current student loans. However, if you have private student loans, you could feel the impact of the Fed hiking or cutting rates on any variable-rate loans. When the U.S. Central bank adjusts the federal funds rate, interest rates respond by periodically increasing or decreasing.

Your personal credit score and history also affects the interest rate that you receive on a private student loan. Your financial history tells a lender how well you've managed your existing debt and is an indicator of how risky you are as a borrower.

When looking for a private student loan with a competitive interest rate, shop around and compare rates and fees, since they can widely vary between lenders.

What affects refinancing interest rates?

When you refinance your student loans, you're taking out a new, private loan to pay off your student loan debt. You may be able to qualify for a lower interest rate and fees, saving money in the long run.

When the Federal Reserve announces rate cuts, it will likely impact refinancing interest rates, since refinancing is just a type of private loan. As with private student loan rates, your credit score, income and general financial health impact the interest rate you'll be offered, so it's important to shop around to find the best refinance loan for your financial situation.

How to calculate student loan interest

Calculating your student loan interest can help you determine your monthly budget. To calculate how much interest you pay each month, use the following steps:

1. Find your daily interest rate. Divide your annual interest rate by 365.
2. Determine your daily interest accrual charge. Multiply your daily interest rate by your remaining principal balance.
3. Calculate your monthly payment. Multiply that daily interest accrual by the number of days in your billing cycle.

Let's say you're charged 5 percent interest on your $10,000 loan every month. Here's what those steps look like:

1. 0.05 (annual interest rate) / 365 = 0.000137
2. $10,000 (principal balance) x 0.000137 = 1.37
3. 1.37 x 30 (number of days in billing cycle) = $41.10

In this scenario, you'll pay $41.10 in interest each month.

Keep in mind that some private loans do carry a variable rate, so the daily interest rate may fluctuate over the life of the loan. You can also use a student loan calculator to calculate your monthly interest charge.

Learn more: How to calculate student loan interest

The difference between subsidized and unsubsidized student loans

Federal student loans can be either subsidized or unsubsidized. The primary difference between the two options is the way you'll pay the interest, your total debt after graduation and your repayment plan.

If you qualify for Direct Subsidized Loans, the Department of Education covers the cost of interest during a specific period of time. If you borrow a Direct Unsubsidized Loan, you'll be responsible for paying interest for the entirety of the loan.

Here are some other differences to be aware of.

Direct Unsubsidized Loans:

• Who pays interest costs? The borrower.
• What's the lifetime maximum limit? $31,000 for dependent undergraduate students, $57,500 for independent undergraduate students and $138,500 for graduate or professional students.
• Do you need to demonstrate financial need? No.
• Who can borrow? Undergraduate students, graduate students and professional degree students.
• Are there extra costs involved? 1.057% fee for loans disbursed before Oct. 1, 2021.

Direct Subsidized Loans:

• Who pays interest costs? The Department of Education pays interest while the student is enrolled in school at least half time, during the six-month post-graduation grace period and during deferment. The borrower pays interest during regular repayment periods.
• What's the lifetime maximum limit? $23,000.
• Do you need to demonstrate financial need? Yes.
• Who can borrow? Undergraduate students.
• Are there extra costs involved? 1.057% fee for loans disbursed before Oct. 1, 2021.

Subsidized loans can be less expensive, since you don't pay interest while you're still enrolled at your school, while unsubsidized loans accrue interest for the entirety of the loan. In order to qualify and receive financial aid, you'll need to fill out the FASFA form each year.

Learn more: The difference between subsidized and unsubsidized student loans

What is the difference between fixed and variable rates?

Student loan interest rates can either be fixed or variable. Fixed interest rates don’t change over your loan term, so you’ll know upfront how much your total cost to borrow will be and what your monthly payments will look like. Federal student loans always offer fixed interest rates.

Private lenders can offer fixed or variable student loans. Variable interest rates change based on market conditions, so your monthly payment may increase or decrease at any time. If you're considering a variable-rate loan, you'll have to decide if the potential for lower rates is worth the unpredictability.

Learn more: Fixed vs. variable rate student loans

How can I reduce my student loan interest rate?

If you're looking to minimize your student loan interest rate, you have a few options:

• Improve your credit score before applying: If you're applying for a loan from a private lender, you'll likely go through a credit check to determine your rate. The better your credit score, the lower rate you'll receive.
• Apply with a co-signer: Many student loan borrowers don't have much credit to their name; if this is your situation, you may want to add a co-signer to your loan. Adding a co-signer with good credit will improve your creditworthiness and could help you get lower rates.
• Choose a variable rate: It's risky, but choosing a variable rate over a fixed one could cause your interest rate to drop during economic downturns. However, keep in mind that you also take on the risk of your interest rate rising.
• Refinance old loans: If you took out a student loan when interest rates were high, you may be able to refinance into a lower interest rate. This is especially true if you have a better credit score now than when you first applied.

Learn more:

• The best student loans
• If you have a student loan, here’s what happens when the Fed lowers rates
• How to calculate student loan interest in 3 easy steps