When you take out a student loan, you agree to repay more than just the amount you borrow. In exchange for lending you the money, the lender will charge an interest fee, 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.

How do student loan interest rates work?

Interest is the extra cost that lenders charge you to borrow money, expressed as a percentage of the principal amount of your loan. 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. A higher rate also increases the overall cost of your loan.

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.

Fixed vs. variable interest rates

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 that 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 become 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 determine interest rates differently.

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, 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 May 5, 2023, rates from top lenders range from 4.44 percent to 16.42 percent.

Lender Fixed rate Variable rate
Earnest 4.45%-14.90% 5.15%-16.42%
College Ave 4.44%-15.32% 4.99%-15.32%
Citizens Bank 4.99%-13.50% 5.40%-14.17%
Sallie Mae 4.50%-14.83% 5.99%-16.33%
SoFi 4.49%-13.80% 5.16%-13.07%

Most experts recommend that you 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 co-signer: Applying with a co-signer can help you get a lower rate, especially if the co-signer has good credit.
  • 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.

What is a good student loan interest rate?

What counts as a good rate largely depends on the interest rate market at the time you apply. In some markets, 7 percent might be a great deal, while in others, 2 percent might be a plausible rate.

To get a measure of how good an interest rate is, one thing you can do is compare it to the federal student loan rate. Federal loans typically have reasonable interest rates. To get a similar or better rate on a private loan, especially a fixed-rate loan, you need to have very strong credit.

A “good” interest rate can also look different for each borrower. A borrower with an average credit score or a short credit history should not expect to receive the lowest rates advertised; in this case, finding the best interest rate for their financial situation requires comparing personalized offers from several different lenders.

How to calculate student loan interest

Calculating interest on your student loans can help you determine how much your loans will cost and 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.

The bottom line

Student loan rates are the percentage you pay on top of the principal borrowed, and they can come in fixed or variable rates. Federal student loans can often have more attractive rates than private loans, and offer more consumer protections. Rates can be affected by a variety of factors, like market changes, your credit score, your debt-to-income ratio and the term of the loan.

Frequently asked questions

  • If you have a variable interest rate on your student loan, changes to rates can affect your payments. Further, rate hikes can affect which kind of rates you can qualify for if you are applying for a new loan.
  • You might look into adding a co-signer onto the loan, which can help you qualify for lower rates. A shorter loan term can help lower rates.You can also work on your credit score to receive better rate offers if you find you do not need the loan immediately. Annual income and other debts can also affect approved credit scores, so it can help to work on overall financial health if you’re able.
  • Student loans are a type of unsecured debt. As such, lenders view student loans as a higher risk. If you default on your car loan or mortgage, the lender seizes the car or home. Student loans don’t offer direct collateral like these other loan types, so rates can be higher to minimize the risk to the lender.