How do interest rates affect my repayments?

Student loan rates are important because they determine the total amount of money a borrower must repay over the course of their loan term.

Difference between subsidized and unsubsidized loans?

With subsidized loans, the government pays any accumulated interest on your behalf while you’re still completing your education. When a loan is unsubsidized, you as the borrower may have to start repaying interest on your principal amount immediately.

How do lenders calculate current student loan rates?

Lenders generally calculate interest using a daily interest formula. That formula is: Number of Days Since Last Payment x (Outstanding Principal Balance × Interest Rate Factor) = Interest amount

Do student loans build interest?

Most federal student loans and private student loans accrue interest daily. That means your lender will use a daily interest formula to figure out the total amount of interest accrued on a given day, and then add it to your monthly balance. Each month you are required to repay the accrued interest that built up throughout the repayment period.

Are student loan rates going up?

Yes, federal student loan rates are going up, as of July 1, 2021. Federal student loan interest rates will reset on July 1, 2021. Student loans disbursed between July 1, 2021 and June 30, 2022 will have the new, higher rates.

Current Student Loan Rates

By Mark Kantrowitz

July 29, 2021

Whether you’re looking to borrow a new student loan or you’re paying down an existing loan, it’s important to understand the interest rate. A student loan interest rate determines the total amount that a borrower pays for a student loan. Generally, the higher the interest rate, the more expensive the loan.

Student loan interest rates vary, depending on whether you borrow a federal student loan or a private student loan. And private student loan interest rates also vary by lender.

Current Federal Student Loan Rates

Currently, all federal student loans have a temporary 0% interest rate, as part of the U.S. government’s COVID-19 relief effort. However, this relief period is scheduled to end on May 1, 2022.

Federal student loan rates reset on July 1, 2021, and apply to all new loans disbursed between July 1, 2021 and June 30, 2022. New federal interest rates are introduced based on the high yield of the most recent 10-year Treasury Note auction. These auctions occur every May.

In the latest 10-year Treasury Note auction on May 12, 2021, there was a high yield of 1.684%, up from 0.70% in 2020. As a result, federal rates increased for the 2021-2022 academic year are:

3.73% for undergraduate Federal Direct Stafford loans, up from 2.75%
5.28% for graduate Federal Direct Stafford loans, up from 4.30%
6.28% for Federal Direct PLUS loans (including Grad PLUS and Parent PLUS loans), up from 5.30%

The rate increase does not affect existing federal loans. Only new loans disbursed between July 1, 2021 and June 30, 2022 will have the current interest rates.

The interest rate on your federal student loan is fixed, which means it will remain the same until you’ve finished repaying the loan in full, or you choose to refinance or consolidate your loan

Current Interest Rates for Private Student Loans

Private student loans offer fixed interest rates and variable interest rates. Variable loans have a fluctuating rate which can go up or down based on market conditions.

Current interest rates on private student loans are at historic lows. Fixed rates are as low as 3.49%, and variable rates are as low as 1.05%.

Fixed rates on private student loan refinance have decreased to as low as 2.97%, and variable rates have dropped to 1.61%.

The government does not set the interest rate on private student loans. Instead, private lenders set their rates, which can vary depending on the loan you take out. That’s why it’s important to compare private lenders before you borrow a private student loan.

Interest rates on private student loans are all credit underwritten. That means borrowers will need to have a good credit score to qualify for the best interest rates. Unfortunately, many students have very little credit history, which means they could end up paying more in interest. Private student loans may also require a cosigner if you don’t have steady income and solid credit.

Want to see how much you will pay for a student loan next year? Use our student loan calculator.

How Student Loan Rates Work

Student loan rates are the interest rates a borrower pays on an education loan. The higher your interest rate is, the more you will pay for your loans.

Interest is a percentage of the amount of money that you borrow. This amount is your “principal balance”. Your total payment, therefore, includes principal and interest.

The amount of interest that you need to pay on your student loan and when that sum needs to be repaid will depend on the type of student loan you’ve taken out and the loan’s terms.

Most student loans are daily interest loans. If you take out a daily interest student loan, your lender or loan servicer will calculate interest daily. That interest accumulates, increasing your payment.

How interest rates affect repayment

Student loan rates determine the total amount of money a borrower must repay over the course of their loan term.

For example, let’s say you were to take out a $50,000 student loan with an annual interest rate of 5%. That would mean in addition to the $50,000 you’ve got to borrow for your education, you’ll need to repay an extra $2,500 worth of interest at the end of each year. However, most student loan interest compounds, meaning, interest is charged on interest. That means your interest payment would be even more than $2,500.

By contrast, if your lender implemented a 10% annual loan rate on that same borrowing amount, you’d have to pay at least $5,000 in interest each year (more if compounding).

Subsidized vs. unsubsidized loans

The Department of Education offers subsidized and unsubsidized loans for undergraduate students. Subsidized student loans are available to students based on financial need.

With subsidized loans, the government pays any accumulated interest on your behalf while you’re still completing your education. In other words, you won’t owe any interest on your student loan until after you graduate.

When a loan is unsubsidized, you as the borrower may have to start repaying interest on your principal amount immediately. However, if your unsubsidized loan qualifies for an in-school deferment you can delay your interest payments (although the interest will continue to accrue over the course of the deferment period).

How Long Will it Take to Pay Off My Student Loan?

The standard repayment period for a federal student loan is 120 months (or 10 years). Repayment terms for a private student loan vary, depending on the lender. But, private lenders generally do not offer the same flexibility and repayment options that are available with federal student loans.

For example, borrowers with more than $30,000 in federal student loans may opt for an extended repayment period of up to 25 years. Federal borrowers may also qualify for an income-driven repayment plan, which could extend the loan term to 25 years.

Interest rates don’t affect the length of your loan, as the term is based on the type of repayment plan you have, such as a standard repayment plan, an extended repayment plan or income-driven repayment plans.

Can I Lower My Interest Rate?

If you’ve borrowed a fixed-rate student loan, your interest rate generally cannot be lowered without refinancing. However, many student loan servicers offer a 25% interest rate reduction for borrowers who enroll in an auto debit scheme.

If you have a variable-rate private student loan, your lender may lower your rate due to market activity. But, variable rates work both ways, and changes in market activity could also cause your student loan interest rate to go up.

Student Loan Refinancing

You can refinance your student loan to take advantage of lower interest rates, but there are several important rules to be aware of.

First, borrowers cannot refinance existing federal student loans into new federal student loans. That means if you’ve got an existing federal student loan, you can’t refinance that loan into a new federal student loan to take advantage of new, lower federal loan rates.

But that doesn’t mean you can’t refinance a federal student loan.

Some borrowers can refinance their federal student loan into a private student loan. If a private lender can offer lower interest rates for a refinanced loan than a borrower currently enjoys via their federal loan, the borrower could end up saving money over the course of their loan.

That being said, borrowers who choose to refinance a federal student loan into a private student loan will also stand to lose many of the superior benefits of federal student loans.

These benefits include the current payment pause and interest waiver, student debt forgiveness options, longer deferments and forbearances, getting to use an income-driven repayment plan, and death and disability charges.

When refinancing a student loan to benefit from current student loan rates, you’ll also need to consider which type of interest rate you’re being offered.

For example, if you’re comparing a fixed federal loan rate to a lower private variable rate, you need to remember that the variable rate you’re looking at may increase in the future. Fixed federal loan rates don’t go up no matter what’s happening in financial markets.

If you have an existing private student loan, it generally makes sense to refinance if a lower rate is available. Private loans are not eligible for the payment pause and interest waiver or any other federal benefits.

Is now a good time to refinance student loans?

Whether it’s a good time to refinance student loans depends on the type of loan you have and the interest rate you are paying.

Private student loan rates are generally decided by lenders of loan servicers based on benchmark indices. Unlike federal rates, private loan rates vary between lenders.

That being said, current private student loan interest rates are sitting as low as 2.97% for fixed-rate products and as little as 1.61% on variable products. These rates are certainly attractive, although it’s always worth shopping around to ensure you’re getting the best possible refinancing rate.

Keep in mind if you refinance a federal student loan into a private student loan you will lose all of the benefits of a federal loan. These benefits include income-driven repayment plan, student debt forgiveness, and longer deferments and forbearances.

The best way to decide when is the right time to refinance your student loan is by consulting our rating of the top 10 best student loan refinance companies.

Does the government provide relief for borrowers affected by COVID-19?

In March 2020, the office of Federal Student Aid introduced a temporary 0.0% interest rate.

This rate was originally intended to last from March 13, 2020 through September 30, 2020. But it was extended through December 31, 2020, and then again through January 31, 2021, and most recently the student loan relief program was extended through at least May 1, 2022.

In addition to the temporary rate relief, the Department of Education has also suspended student loan payments and stopped all collections on defaulted loans. These measures are also in effect through at least May 1, 2022.

The 0.0% interest rate applies only to existing federally held student loans, although borrowers can still choose to make interest payments on their loans if they wish.