What is a student loan rate?
Student loan rates are the rates of interest applied to student loans.
Interest is an amount of money that you pay to a student loan provider in exchange for getting to borrow their money to pay for your higher education.
Interest is calculated as a percentage of the amount of money that you borrow. This amount is called your “principal balance”.
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 will then accumulate and be added to the outstanding amount you must repay.
What’s the difference between subsidized loan rates and unsubsidized loan rates?
There are two main types of federal student loans: subsidized student loans and unsubsidized student loans. Whether a loan is subsidized or unsubsidized will determine when a borrower is going to be expected to start repaying interest on their principal loan balance.
When a loan is subsidized, it means that the U.S. Government will pay any accumulated interest on your behalf while you’re still completing your education. That means you won’t be expected to repay a cent of 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. That being said, if your unsubsidized loan qualifies for an in-school deferment you won’t need to repay interest immediately (although the interest will continue to accrue over the course of the deferment period).
How do student loan interest rates affect my repayments?
Student loan rates are important because they have an impact on 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. If interest is compounding (where interest is charged on interest) it 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 be required to pay at least $5,000 in interest each year (more if compounding).
That’s why interest rates matter, and it’s important to bear that in mind when choosing a student loan with various repayment options.
How are current student loan rates calculated?
Interest rates are generally calculated using a daily interest formula. That formula is:
- Number of Days Since Last Payment x (Outstanding Principal Balance × Interest Rate Factor) = Interest amount
When daily interest accrues, it’s typically added to the borrower’s monthly balance.
While this loan rate formula applies to many loan types, it’s important to note that the interest rates on federal student loans are set through federal law instead of regulators or private companies.
These government-set interest rates are known as “federal student loan rates”.
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 that amount is then added to your monthly balance.
At the end of each month, you’ve got to repay the accrued interest that your student loan built throughout the repayment period.
The exception is subsidized federal loans. In this case, the federal government typically pays the loan interest while you are in school and during a six-month grace period after you graduate. So, with a subsidized loan, the interest doesn’t build on your loan until after the grace-period.
What’s the difference between a fixed student loan rate and a variable rate?
There are two types of interest rates that are commonly associated with student loans: fixed rates and variable rates.
When a student loan rate is fixed, that means the interest rate for that loan will stay in place for the lifetime of the loan. If you borrow money at an annual loan rate of 5.5% for a duration of 10 years, you’ll continue to pay the same loan rate even if your lender increases its interest rates for new loans.
Federal student loans in the United States are generally all fixed-rate loans.
A variable student loan rate can go up and down based on market conditions. That means a borrower could take out a 10-year student loan with a variable rate of 3.0% per year. But after two years of repayment, the borrower’s interest rate could increase to 4.5% annually.
Private lenders calculate variable rates by relying on a market index rate such as the Secured Overnight Finance Rate (SOFR).
These benchmark rates are a representation of the cost of borrowing money in the U.S. and abroad — and generally tell banks how much it should cost to borrow cash.
Private lenders tend to offer a range of both variable-rate loans and fixed-rate loans.
Do federal student loans have fixed interest rates?
All federal student loans offer a fixed interest rate. These interest rates are dictated by U.S. federal law, and each rate offered applies to the loan package for its lifetime.
That means the interest rate you accept for a U.S. federal student loan will remain the same until you’ve finished repaying the loan in full, or you choose to refinance or consolidate your loan.
Private student loans may also offer fixed interest rates. But private lenders typically offer variable student loans as well. Variable loans have a fluctuating rate which can go up or down based on market conditions.
Are student loan rates going down?
Yes, federal student loan rates are currently going down, as of October 2020.
On July 1, 2020, a new student loan rate was applied to all federal student loans. This has resulted in a decrease of 1.779% worth of interest on all new student loans that are awarded between July 1, 2020 and June 30, 2021.
But while student loan rates are generally going down for 2020/21, it’s important to bear in mind that different federal loan types still have different interest rates attached to them.
Also, variable private student loan rates could increase at any time based on market conditions. . When considering a private loan with a variable rate, you should ask your lender how often the rate may change. In some cases it can be monthly while others may only adjust every three months or less.
What are the new federal student loan rates?
The interest rates that are applied to U.S. federal loans are called “federal student loan rates”.
Federal student loan rates are set by U.S. law, but it’s worth bearing in mind that private student loans aren’t compelled to use the same interest rates that are applied to federal student loans.
In July 2020, new federal student loan rates were introduced. These new rates represent a decrease of 1.779% for all new loans. But to be eligible for lower rate, the loan must have been disbursed between July 1, 2020 and June 30, 2021.
These new federal student loan rates are:
- 2.75% for undergraduate Federal Direct Stafford loans
- 4.30% for graduate Federal Direct Stafford loans
- 5.30% for Federal Direct PLUS loans (including Grad PLUS and Parent PLUS loans)
These new federal student rates only apply to loans that are disbursed between July 1 2020 and June 30, 2021, and these rates are fixed for the lifetime of those student loans.
Want to see how the current federal loan rates will impact your student loan? Use our student loan calculator.
How will new loan interest rates impact student loans?
Because federal student loan rates are going down, borrowers will benefit from a lower monthly payment.
For every $10,000 borrowed, your monthly payment should be around $8.37 per month lower thanks to the new federal loan rates. That equates to a decrease of 8.1% if you’re borrowing according to a 10-year repayment term.
Because of these lower student loan payments, borrowers should save approximately $100 per year in interest payments, and $1,004 per every $10,000 borrowed over the lifetime of a loan.
It’s important to note that the new federal student loan rates will only impact student loans that have been disbursed between July 1, 2020 and June 30, 2021.
Current federal loans won’t be affected by the new rates, and federal student loans cannot be refinanced into new federal student loans.
How long will it take to pay off my student loan with current federal rates?
The standard repayment period for a federal student loan is 120 months (or 10 years).
Borrowers with more than $30,000 in U.S. federal loans can instead opt for an extended repayment period of up to 25 years. Some federal borrowers may qualify for an income-driven repayment plan, which could extend the loan term to 25 years.
The current federal loan rates don’t affect the length of your loan, as the term based on the type of repayment plan you have, such as a standard repayment plan, an extended repayment plan or income-driven repayment plans.
Instead, lower federal loan rates simply mean borrowers are required to pay less interest on their monthly balance on new loans disbursed. The duration of the repayment schedule is not affected.
That being said, it’s important to note that these current rates (which are lower than previous rates) only apply to new loans. If you have an existing loan, these lower rates will not be applied to your agreement.
What are the current student loan rates for private loans?
Private student loan rates aren’t set by U.S. federal law. As a result, current student loan rates for private loans vary.
Currently, (as of October 2020) interest rates on new private student loans have dropped to as low as 4.0% on fixed-rate private student loans. Likewise, current student loan rates have decreased to as much as 1.5% on variable-rate private student loans.
Interest rates on private student loan refinance have decreased to as low as 2.99% on fixed-rate private refinance student loans and 1.99% for variable-rate private refinance student loans.
Another point worth bearing in mind when considering private student loans is that the interest rates on these loans are all credit underwritten.
That means borrowers will need to have a good credit score to qualify for the advertised interest rates. Unfortunately, many students have very little credit history, which means many borrowers won’t have a high enough credit score to qualify for the best interest rates that were advertised for a given student loan type.
What type of student loan has the lowest interest rate?
Student loans offer different interest rates, but it’s important to bear in mind that the lowest possible interest rate isn’t the only factor you should consider when shopping around for student loan options.
Private lenders offering variable interest rate student loans will often advertise the lowest marketable rate. But it’s critical to remember that variable rates can go up or down based on market activity over the course of your loan.
That means it’s worth carefully considering all of your loan options before accepting a private variable rate loan.
Similarly, private lenders typically offer student loan products with interest rates that are linked to your credit score. As a result, there’s a good chance that you won’t be able to qualify for the lowest possible interest rate that a lender advertised to you if your credit score is sub-par.
By contrast, federal student loan rates are set by U.S. law each year based on Treasury benchmarks. The rates that borrowers receive with government-backed loans are set for the duration of the loan term.
That means your interest levels won’t increase during your repayment period. Federal student loans also often come with many benefits that aren’t offered with private student loans, such as subsidized payments for your interest while you’re in school.
Can you ask for a lower interest rate on student loans?
If you’re borrowing money for college from the U.S. Government, you can’t ask for a lower interest rate on your student loans.
Federal student loan rates are set each year by U.S. federal law. That means the interest rates attached to government-backed student loans are non-negotiable.
You can ask for a lower rate for a private student loan, but there is no guarantee you will get it.
You can also choose to refinance your student loans if rates have gone down. But, keep in mind that if you refinance a federal student loan to a private one you will lose all of the benefits of a federal loan (such as loan forgiveness options).
How do I get my student loan interest rate lowered?
If you’ve borrowed money on a fixed-rate basis, your student loan interest rate generally cannot be lowered without refinancing.
That being said, many loan servicers will offer a nominal interest rate reduction for borrowers that enroll in auto debit schemes.
An auto debit scheme is simply a direct deposit order lenders use to ensure that you make your monthly loan repayments on time. Many loan servicers in the US offer a 0.25% interest rate reduction on eligible private and federal loans in situations where the borrower is using a designated auto debit scheme.
By contrast, borrowers with variable term student loans can have their interest rate lowered by their lender as a result of market activity.
But variable rates work both ways, and changes in market activity could also result in your student loan interest rate going up.
Can current student loan rates be refinanced?
Student loans can be refinanced to take advantage of lower interest rates, but there are several important rules that apply to student loan refinancing.
First and foremost, borrowers cannot refinance old 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 the government’s new (and lower) 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 superior 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.
Is now a good time to refinance student loans?
Federal student loans can’t be refinanced into new federal student loans. That means borrowers with existing federal loans won’t be able to benefit from the newer and lower federal rates.
But because federal student loans can be refinanced into private student loans, the question of when is the best time to refinance depends on current private student loan rates.
Private student loan rates are generally decided by lenders of loan servicers based on benchmark indices. Unlike federal student loan rates, private loan rates vary between lenders.
That being said, current private student loan interest rates are sitting as low as 4.0% for fixed-rate products and as little as 1.5% 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 plans.
What is the formula for federal student loan interest rates?
The formula for federal student loan rates is different than the ordinary interest rate formula we’ve already covered. That’s because federal loan rates are formulated using government benchmarks.
Every year, 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, 2020, there was a high yield of 0.700%. That represents a drop from 2.479% in 2019. Because the high yield decreased in 2020, federal loan rates decreased, too.
Does the government provide student loan rate relief for borrowers affected by COVID-19?
In March 2020, the US Secretary of Education told the office of Federal Student Aid to introduce a temporary 0.0% federal student loan 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 September 30, 2021.
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 September 30, 2021.
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.
Which federal student loans does the 0% rate apply to?
The US Government’s 0.0% federal student loan rate applies to the following types of federal student loans:
- Defaulted and nondefaulted Direct Loans
- Defaulted and nondefaulted Federal Family Education Loan (FFEL) Program loans
- Defaulted and nondefaulted Federal Perkins Loans
- Defaulted Health Education Assistance Loan (HEAL) loans
That being said, it’s important to note that some federal student loan programs are owned by commercial lenders.
These programs may include FFEL Program and HEAL loans, while some Perkins loans are owned by the borrower’s college or university. These loans aren’t eligible for the government’s temporary 0.0% interest rate.