Interest Rates on Student Loans

Student loans are meant to help individuals reach their higher education goals. Because of this, they typically carry lower interest rates than other types of loans and debts. Still, your exact interest rate is based on what type of loan you take out.

Federal student loans tend to come with low interest rates, especially if they are need-based. The federal government sets fixed interest rates for the different loans they have available for students. Privately funded student loans depend on your credit history and tend to carry higher rates. However, these interest rates can still be significantly lower than the rates of other loans such as credit card debt.

Interest is tacked onto the total amount of money that you owe. This means that as you pay back the original amount of money you borrowed, you are also responsible for paying any interest that accrues. It can add considerably to the total amount you owe, especially if you defer your payments and allow interest to accumulate before you begin your repayment plan.

If you’ve already started a student loan repayment plan and are struggling to keep up, Debt.org can help.

Interest Rates for Federal Student Loans

Federal student loans interest rates for the 2019-2020 school year range from 4.53% to 7.08%. As of July, 2006, all federal student loans have fixed interest for the life of the  loan. Although rates are reevaluated by Congress every year, the interest rates on existing loans will not be affected.

Stafford loans for undergraduates in 2019-2020 came with interest rates of 4.53%. The Stafford loan rate for graduate students is 6.08%. Stafford Loans are the most common type of federal student loan. If your Stafford loan is subsidized (based on financial need) rather than unsubsidized, it does not begin accruing interest until after you leave school.

Parents and graduate students may be eligible for PLUS loans, another type of federal student loan. At 7.08%, these have the highest interest rate of any federal student loan.

It should be noted that there is an aggregate limit to how much money students may borrow on federal loans. Undergraduates can only borrow $57,500 in total and no more than $23,000 of that can be a subsidized loan. Graduate students may borrow $138,500 and no more than $65,500 can be subsidized.

The graduate loan amounts include any money borrowed to obtain an undergraduate degree.

Interest Rates for Private Student Loans

Interest rates on private student loans are almost always higher than those for federal loans, but with the historically low lending rates offered in 2019-2020, the market has suddenly become much more competitive.

That is important to students who have reached their borrowing limit on federal loans, but still need money to complete a degree. It also helps students have a good credit score or a co-signer with a good credit score, and could be eligible for the lowest rates available from private lenders.

A survey of six lenders — SunTrust, Ascent, SoFi, CommonBond, Discover and Sallie Mae — showed fixed rates ranging from 4.29% to 12.49%, while variable rates were offered from 1.80% to 14.18%.

Prospective students should keep a close eye on interest rates if they are considering private student loans. If available rates are 3% to 4%, it can be an enticing option compared to federal student loans.

You can also consolidate private student loans, possibly saving money on your monthly payment, depending on your credit score and income.

With a variable rate, though, you might start with a very low rate and end up with one in the double digits.

Federal student loans are funded through the government and credit scores are not a factor. Private student loans, on the other hand, are acquired from a bank, credit union or online lenders and credit scores are a big factor in determining the interest rate.

While federal student loans have flat interest rates set by Congress, the private student loan interest rates largely depend on your credit rating. If your credit score is below 690, you probably will pay a higher interest rate for a private loan than you would for a federal loan. Like any loan, higher credit scores and incomes tend to get the best rates and higher borrowing amounts.

Because it’s a student loan — and undergraduates probably don’t have established credit or income — a co-signer is usually required for private student loans. In some instances, for borrowers without a co-signer, lenders will consider career and income potential when assessing the loan.

How are Student Loan Interest Rates Set

Since 2013, federal student loan interest rates are set each year based on the 10-year Treasury note rate following the May auction (which was 2.13% for 2019-20).

There is a set margin of 2.05 percentage points for undergraduate student loans, 3.60 points for graduate student loans and 4.60 points for PLUS loans. Rates are fixed for the life of the loan, although rates for new loans are set each year.

Here are the calculations for 2017-18:

• Undergraduate student loans — 40 rate plus 2.05 percentage points equals 4.45% interest rate.
• Graduate student loans — 40 rate plus 3.60 percentage points equals 6.00% interest rate.
• PLUS loans — 40 rate plus 4.60 points equals 7% interest rate.

The current interest rate system was established in 2013, when President Barack Obama signed the Bipartisan Student Loan Certainty Act. After July 1, 2013, all annual percentage rates (APRs) were linked to the 10-year U.S. Treasury Rate. The law also capped all Stafford loan rates at 8.25% (undergraduates) and 9.50% (graduate students).

U.S. Sen. Richard Burr (R-North Carolina) said the law has saved borrowers about $58-million in student loan interest since it was enacted.

History of Student Loan Rates

For some historical perspective, here’s a look at federal student loan interest rates over the past 12 years.

*Indicates subsidized loan

How to Get a Federal Loan

You can get the lowest interest student loans by applying for a federal loan. You must file a Free Application for Federal Student Aid (FAFSA), which is used by the federal government and most college and universities to determine the eligibility of a student applying for non-merit based financial aid.

Filing a FAFSA form is the first step in applying for more than 90% of aid money. Merit-based aid, which accounts for the other 10%, is awarded based on talent.

By filing a FAFSA, student can qualify for Pell Grants, Perkins Loans, federal work-study and subsidized Stafford Loans. Graduate students can qualify for unsubsidized Stafford Loans or PLUS Loans.

All applicants must:

• Be a U.S. citizen, national or eligible non-citizen
• Demonstrate financial need
• Have a valid Social Security number
• Have a high school diploma or GED
• Be registered with the U.S. Selective Service (males 18-25)
• Be enrolled or accepted for enrollment at an eligible degree or certification program
• Not owe refunds on federal student grant
• Not be in default on student loans
• Not be guilty of the sale of illegal drugs while federal aid was being received

The FAFSA consists of approximately 130 questions related to the student’s and parents’ assets, investments, income, taxes paid, household size and number of dependent students in the family attending college or graduate school.

A student is considered a dependent and must include parental information on the FAFSA until he or she:

• Turns 24 years old
• Enrolls in a graduate program
• Gets married
• Becomes an orphan or ward of the court
• Becomes a veteran of active military service
• Has one or more dependent children

The FAFSA requires detailed information about a family’s finances. In order to verify the accuracy of submitted information, the Department of Education and college financial aid offices may request copies of income tax returns, W-2 statements, 1099 forms or other documentation. Families refusing to supply required documentation risk being denied any form of federal student aid. On the FAFSA, students also identify the schools to which they are applying.

Prospective college students and their parents can file a FAFSA submission starting Oct. 1 of the student’s senior year in high school. Previously, the filing date was Jan. 1, but the law was changed permanently for the 2017-2018 school year. FAFSA forms should be filled out no later than March 15, though many schools have earlier deadlines. Since some aid is provided on a first-come, first-served basis, colleges suggest that students submit their FAFSA as early as possible.

Upon receipt of the FAFSA, a federal processor examines the information and enters it into the Federal Methodology (FM) formula, a complex analysis that determines a students Expected Family Contribution (EFC) — the dollar amount that a student and/or family should be able to pay toward the Cost of Attendance (COA). If the EFC is less than a college’s COA, the student qualifies for need-based financial aid (COA — EFC = Need). A student may qualify for need-based aid at one college, but not at another.

Within three weeks after submission, the student will receiver a Student Aid Report (SAR), which is a summary of the FAFSA. This information also is forwarded to all of the schools to which a student has applied, as well as to state agencies that award need-based aid.

For each year that a student plans to attend college, he or she must fill out a new FAFSA. Each institution is likely to have its own deadline. If FAFSA is filed online, answers from the previous year will be filled in automatically. Only updated tax and financial data will need to be added.

Managing Loan Costs

There are three ways to manage the costs of a student loan.

1. Apply for scholarships or grants. This will limit your need to borrow at all. Every dollar of educational costs you can cover with scholarships or grants (instead of loans) will save you even more in repayment. But you must be committed to seek out the scholarships and grants.
2. Pay as you go: If you can pay ahead while you go to school — making sure the extra funds are going to the principal and not extra payments — you should realize considerable savings. Even if it’s a low-paying, on-campus job, every $1 you don’t borrow in federal loans will actually save you $1.24 (accounting for interest).
3. Refinance: Once you graduate, refinancing your student loans can lower your interest rates. When you have a career and stable income, this becomes an attractive option. It might be tempting to initially select a variable interest rate or have a longer repayment plan (that carries a lower monthly payment), but a shorter repayment plan will save you the most money. You might look into other plans, such as an income-driven repayment program or federal student loan forgiveness.