Student Loan Interest Rates Discover
As a student loan borrower, you’re likely to be asked about your interest rate. A lot. But it’s not just your lender who wants to know—it’s also friends and family who are curious about how much money you’ll have after graduation and employers evaluating whether they can afford to hire you based on your debt burden. As such, understanding how interest rates work is an important part of making smart borrowing decisions that won’t wreck your financial life for years to come.
The interest rate you pay on your student loans is a percentage of the amount borrowed. It is the cost of borrowing money and can be expressed as a simple annual percentage rate (APR). The current federal interest rate for new subsidized Stafford loans, which are graduate students’ most common type of loan, is 4.5%.
Why the interest rate matters
The interest rate is the cost of borrowing money. It’s the amount of interest you pay on your loan, and it’s expressed as an annual percentage rate (APR) or annual percentage yield (APY). The lower your interest rate, the less you’ll pay in finance charges for using your credit card.
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The current interest rate landscape
The interest rate you pay depends on your student loan type and the year in which you borrowed. Here’s how it works:
- Interest rates are based on the 10-year Treasury rate. This is a benchmark that banks use to determine interest rates for mortgages, car loans and credit cards. The 10-year Treasury rate is typically higher than what students pay because Congress allows the government to borrow money from investors at low rates, then lend those same funds to students and parents at higher ones.
- Interest rates vary by year and loan type. Federal direct loans have fixed interest rates that don’t change over time; federal PLUS loans do have variable rates that increase when the 10-year Treasury increases but don’t decrease when it decreases — unlike federal subsidized Stafford Loans (see below). Federal unsubsidized Stafford Loans have variable rates as well, though they’re capped at 8.25%. And private student loans always have variable interest rates tied to changes in market conditions such as inflation or economic growth
Interest rates and private loans
A private student loan is a federally guaranteed or insured loan that is not issued by the federal government. Interest rates on private loans are typically higher than those of federal loans, though they may offer more flexible repayment options and better customer service.
Private Student Loan Interest Rates
- Private student loans are offered from banks and credit unions, as well as other organizations like schools or state-based agencies. They’re typically marketed through colleges or universities, but lenders also advertise directly to students.
- The interest rate for private student loans is determined by the market at the time you apply for your loan—it won’t be set in stone until after your application has been approved by the lender and funds have been disbursed to you (if applicable). In general, interest rates on private student loans tend to fluctuate throughout each year depending on prevailing economic conditions; however they usually range between 5%–16%.
How to get the lowest student loan interest rate possible
The first step in getting the lowest student loan interest rate possible is to understand what your current interest rate is. You can get this information from your financial aid office, or from your lender.
If you’re not sure what kind of student loan interest rate you’ll get, apply for as many different loans as possible. There are a few different factors that affect loan terms:
- Your state of residency
- The type of school you attended (public vs. private)
- Whether or not you were awarded a scholarship or grant
Student loan interest rates are one of the biggest factors you should consider when shopping for a student loan. Private student loans, like federal loans, typically have fixed and variable interest rates, but fixed rates are almost always higher than variable rates. Borrowers in financial hardship can apply for temporary relief through loan forbearance or deferment.
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Before you decide which student loan is right for you, it’s important to consider the interest rate. The rate will vary depending on whether you choose a federal or private loan, as well as whether or not the loan is fixed or variable. Interest rates are typically higher than average when they’re fixed and lower than average when they’re variable, but they can also be higher if your credit score isn’t great or if you have other bad credit factors working against you.