Guide to student loan interest rates

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When you take out a student loan, you agree to repay more than just the sum of the loan. In exchange for lending you the money, the lender will charge an interest fee. A portion of your monthly payment will go toward interest, which can significantly affect how expensive your loan is and how long it takes to pay off.

All lenders use different criteria to determine your student loan interest rate, so it’s important to compare multiple loan offers. Before taking out a student loan, make sure that you understand how interest rates work and how they can affect your student loan repayment.

What are student loan interest rates?

Interest is the extra cost that lenders charge you to borrow money. Student loan interest rates are expressed as a percentage of the principal amount of your loan.

Student loan interest rates are relatively low, especially compared to those of personal loans, credit cards and payday loans. However, not all student loans carry the same interest rate, even if they’re from the same lender.

How do student loan interest rates work?

Your interest rate has a huge effect on your student loans. The higher the rate, the more interest you’ll pay every month. A borrower with a higher interest rate will have higher monthly payments than a borrower with a lower rate, even if they both took out the same amount originally.

Typically, choosing a longer repayment term will give you a higher interest rate and vice versa. However, your interest rate also largely depends on your credit score, income and more.

In general, interest on a student loan compounds monthly, which means that the amount you pay in a given month is based on the remaining loan amount.

Difference between fixed and variable interest

Student loan interest rates come in one of two forms: fixed or variable. With many lenders, borrowers can choose between fixed and variable rates when they select a loan. They can also refinance to a fixed or variable interest rate later on.

Fixed interest rates

As the term suggests, fixed interest rates remain the same for the life of your loan, which means your monthly payment will also stay the same. Fixed interest rates provide more certainty, which is worthwhile if you’re not much of a risk-taker.

Variable interest rate

With variable interest rates, your interest rate can change over time as the current student loan interest rates on the market go up and down. In general, variable interest rates start out lower than fixed interest rates, making them more attractive. But they could be more expensive in the long run, especially if you have a long repayment term.

That said, if you have a short repayment period and market rates don’t increase too much during the term, a variable interest rate could ultimately save you money.

Federal vs. private student loan interest rates

Student loans can come from either the U.S. Department of Education or private lenders. Federal and private student loans have different ways to determine interest rates.

Federal student loan interest rates

Federal student loan interest rates are set by Congress. The rates are standardized, which means that everyone who qualifies for a loan in a given year pays the same interest rate. However, federal student loan interest rates typically change from year to year.

Here’s how rates have changed in the last five years:

Direct Loans for undergraduate students Direct Loans for graduate/professional students Direct PLUS Loans for parents and graduate/professional students
Interest rates for 2017-18 4.45% 6.00% 7.00%
Interest rates for 2018-19 5.05% 6.60% 7.60%
Interest rates for 2019-20 4.53% 6.08% 7.08%
Interest rates for 2020-21 2.75% 4.30% 5.30%
Interest rates for 2021-22 3.73% 5.28% 6.28%

Note: New rates take effect July 1 of each year.

Private student loan interest rates

Unlike the federal government, private lenders use risk-based pricing to determine student loan interest rates. You must be manually approved by the lender, and your interest rate will be determined by factors like your credit score and history, income, other debt payments and more. If you’re having trouble qualifying for the lowest rates on your own, you can always recruit a qualified co-signer.

As of June 29, 2021, rates from top lenders range from 1.04 percent to 14.5 percent.

Lender Fixed rate Variable rate
Earnest Starting at 3.34% Starting at 1.04%
College Ave 3.34%–12.99% 1.04%–11.98%
Citizens Bank 4.18%–10.95% 1.15%–10.41%
Credible 3%–14.5% 1.04%–13.19%
LendKey 3.99%–7.62% 1.49%–7.64%
SoFi 4.08%–10.9% 1.05%–11.34%

Always max out your federal loans before taking out a private student loan. Private loans carry more risk than federal loans because they don’t provide protections like access to income-driven repayment plans, forbearance and deferment options or student loan forgiveness programs.

What factors into your student loan interest rate?

The factors that determine your student loan rates depend on the type of student loan you take out. With federal loans, the two primary factors are the type of loan you apply for and when the loan is disbursed.

With private student loans, multiple factors go into that decision, including:

  • The lender: Each lender has its own criteria for calculating risk and determining how much to charge.
  • Market interest rate trends: Lenders may use the London Interbank Offered Rate (Libor) or prime rate to help determine their interest rates.
  • Your credit score and credit history: Your credit score provides a snapshot of your overall credit health, but lenders will also review your credit reports to determine how you’ve managed debts in the past. A strong history can help you score a lower interest rate.
  • Your annual income: It’s important for lenders to understand whether you can actually afford to make your monthly payments. They’ll use your gross monthly income to get an idea of your ability to pay.
  • Your other debt payments: Lenders will use your gross monthly income and your other monthly debt payments to calculate your debt-to-income ratio. The higher the ratio, the higher your chances of getting overwhelmed and missing a payment.
  • The loan term: A long repayment term can represent a higher risk to lenders because it gives you more time to potentially miss a payment. It also increases the odds that the lender will miss out on higher interest rates for new loans. As a result, picking a shorter repayment term could help you score a lower interest rate.

It’s also important to keep in mind that the length of time you take to repay your loan has a significant impact on how much interest you’ll pay in total. For example, if you choose a 20-year repayment plan over a 10-year plan, you’ll end up paying more money overall because of the extended timeline.

In most cases, lenders charge a higher interest rate for longer terms. Choose the shorter term if you can afford the monthly payment.

How to calculate student loan interest

Calculating interest on your student loans can help you determine how much your loans will cost and also show how much you could save by paying more each month. If you want to save some time, use an online calculator to do the math.

If you want to do it on your own, the process requires just three steps:

  1. Find your daily interest rate: Take your interest rate and divide it by 365. If your rate is 2.75 percent, your daily rate would be 0.007534 percent.
  2. Calculate your daily interest accrual: Multiply your daily interest rate by your current loan balance to get your daily accrual charge. With a $15,000 balance, your daily interest would be $1.13.
  3. Determine your monthly interest charge: Multiply your daily interest accrual by the number of days in your billing cycle. With a 30-day cycle, the monthly charge would be $33.90.

Keep in mind that as your principal balance goes down, so will the amount you pay in interest. Also note that if you have a variable-rate loan, your interest rate will fluctuate. Finally, if your lender charges compound interest, you’ll pay interest on both the principal loan amount and any unpaid interest accrued, which would increase your monthly payment.

How to save on student loan interest costs

There are a few ways you can reduce how much you pay in student loan interest, starting before you borrow any money and continuing throughout the repayment process:

  • Search for scholarships and grants: The main draw of scholarships and grants is that you don’t have to pay them back. The more scholarships and grants you can use to pay for school, the less you’ll need to borrow from the federal government or private lenders. Fill out the Free Application for Federal Student Aid (FAFSA) every year for federal aid, and devote an hour or two every week to finding and applying for private grants and scholarships on scholarship search websites.
  • Apply for a job: If your class schedule permits it, look for work opportunities to earn money for college expenses. If your hours are hectic, consider starting a side hustle to allow for more flexibility in your schedule.
  • Add extra payments after graduation: Once you start working, create a budget to see where your money is going. Look for ways to cut back in nonessential areas so you can add extra cash to your monthly payments.
  • Set up automatic payments: Many student loan servicers and lenders offer an interest rate discount if you set up autopay on your account. The discount is generally small, but it will still save you money. Some private lenders may also offer loyalty discounts if you have other accounts with them, which could add even more savings.
  • Refinance your student loans: Refinancing your student loans involves replacing your current loan with a new loan from a private lender. Depending on your income and credit profile, you could qualify for a lower rate than what your existing loans offer. Not everyone qualifies, however, and refinancing federal loans will cause you to lose out on access to income-driven repayment plans and loan forgiveness. Also, private lenders typically aren’t as generous with their forbearance and deferment programs.

The bottom line

Interest rates can make it even harder to pay off student loan debt, but the more you understand how they work, the less of a surprise it will be when it comes time to make payments.

Take steps now to shop around for the lowest student loan interest rates and set up a plan for repayment. Using a student loan calculator can help you determine how different interest rates will affect your repayment. If you take out private student loans, consider refinancing them after you graduate for a lower rate.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
Edited by
Student loans editor