If you’re an undergraduate student, graduate student, or young adult looking for a student loan or with student loan debt, you might be trying to weigh your options. Because of the rising cost of postsecondary education, more and more people are taking on student loans to help cover the cost of tuition, room and board, books, and more.
The biggest student loan lender is the federal government through the Free Application for Federal Student Aid (FAFSA). With the FAFSA, you’ll get approval for scholarships, grants, work-study programs, and student loans. If you don’t complete the FAFSA or your expected family contribution is higher than expected, your next best option might be private student loans.
Federal student loans have fixed interest rates for all borrowers — regardless of credit rating. Federal interest rates vary depending on whether a student is in an undergraduate program, graduate program, or if a parent is borrowing on behalf of their child. In contrast, private student loans are offered by banks, credit unions, or online lenders. These loans come with a wide range of fixed or variable interest rates.
Read on for more discussion on how interest rates work and current rates for federal and private student loans and lenders.
How Do Student Loan Interest Rates Work?
When you apply and get approved for a student loan, you’ll agree to an interest rate. The interest rate is the cost of borrowing. The interest rate is a percentage that the lender charges on the loan’s principal. Interest rates are typically noted on a yearly basis and they are referred to as an annual percentage rate (APR).
The interest rates for federal student loans and private student loans are set and determined differently. Follow along below as we differentiate between federal and private student loans.
Federal Student Loans
When you’re looking to take out student loans, it’s recommended that you exhaust all available scholarships, grants, work-study programs, and federal student loans with the U.S. Department of Education before applying for private student loans. Federal student loans have extensive borrower protections, such as forbearance, deferment, and income-driven repayment plans. And, more often than not, interest rates are lower — making them typically more affordable than private lenders. Federal student loans also come with fixed interest rates, meaning you’ll be able to predict your monthly payments.
When taking out federal student loans, you may select or be assigned a repayment plan, but you can change it at any time through your student loan servicer without a fee. The federal government also offers loan forgiveness programs and eight repayment options to choose from, five of which depend on how much you’re earning at the time of repayment.
Private Student Loans
Private student loans are offered by banking institutions, credit unions, and private online lenders. Each lender has its own application process, eligibility requirements, interest rates, and repayment terms. You should research which private student loan lender can give you the best interest rate, borrower protections, and repayment terms before signing on with one.
The chance of getting approved for a private student loan depends largely on your credit score and income. Since undergraduate and some graduate and professional students don’t have established credit or income, a co-signer is almost always required to be approved for a private student loan. Generally, borrowers or co-signers with higher credit scores or excellent credit qualify for interest rates.
Some lenders offer loans for students without a co-signer, but they typically take career and income potential into consideration for approval.
For most types of private student loans, though, here are the general requirements:
- You are a U.S. citizen or permanent resident.
- You’re at least 18 years of age.
- You’re attending an eligible school (one that processes financial aid).
- You’re enrolled at least half-time at an eligible school.
- You pass a credit check where you or your co-signer needs a minimum credit score in the high 600s — a FICO score in the 700s may qualify you for lower rates.
- You or your co-signer may need to show proof of income.
- Your or your co-signer’s debt-to-income ratio might be assessed.
What Is the Current Interest Rate on Student Loans?
The office of Federal Student Aid announced lower interest rates for the 2020-21 school year for federal education loan borrowers. For undergraduate students, the interest rate is currently 2.75%. Keep in mind that Federal Student Loans also charge an origination fee. For the 2020-21 academic year that fee is 1.057%. Even though the fee isn’t part of the interest rate, it does increase the cost of borrowing.
If you’re looking at private student loans, you may see rates lower than 2.75% depending on the lender. However, your chance of qualifying for lower rates also depends largely on the type of loan for which you’re applying,your credit score, and especially the credit and income strength of the co-signer. Check out the tables below for a quick comparison of interest rates from different lenders, including the federal government.
Federal Student Loan Interest Rates (Fixed)
Federal loan borrowers who took out the same type of loan in a given year have the same interest rate. The federal student loan interest rate for loans disbursed between July 1, 2020, and July 1, 2021, are as follows:
|Loan Type||Borrower||Fixed Interest Rate|
|Direct Subsidized Loans and Direct Unsubsidized Loans||Undergraduate Students||2.75%|
|Direct Unsubsidized Loans||Graduate or Professional Students||4.30%|
|Direct PLUS Loans||Parents and Graduate or Professional Students||5.30%|
There’s also a fee of 1.057% for Direct Subsidized and Unsubsidized Loans and 4.228% for Direct PLUS Loans. This fee is deducted proportionately from each loan disbursement you receive.
For federal student loans, Congress sets interest rates yearly based on 10-year Treasury notes. The interest rates are always fixed and won’t change over the life of the loan unless you consolidate or transfer your loans to private lenders through refinancing. If you’re applying for Subsidized and Unsubsidized Loans, your interest rate doesn’t take your credit score into account.
However, if you’re applying for Direct PLUS Loans, you’ll have to pass a credit check. If your credit history includes loans in default, foreclosure, or bankruptcy, you might not get approved for a PLUS Loan. The same is true if you are a parent taking out a PLUS Loan for your dependent child; you’ll need a good credit score to qualify.
Private Student Loan Interest Rates
For private student loans, you may have a choice between fixed and variable interest rates. A fixed rate stays the same throughout the life of the loan. A variable interest rate fluctuates with the market, and so do your monthly payments.
Most private student loan lenders adjust their interest rates monthly or quarterly using the London Interbank Offered Rate (LIBOR). LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It’s among the most common interest rate indices used to make adjustments to variable rate consumer loans.
|Lender||Fixed Rate APRs||Variable Rate APRs|
|Sallie Mae||4.25% – 12.59%||1.25% – 11.35%|
|College Ave||3.34% – 12.99%||1.04% – 11.98%|
|Earnest||3.49% – 12.78%||1.05% – 11.44%|
|Custom Choice||3.99% – 10.56%||1.03% – 9.53%|
|Discover||4.24% – 12.99%||1.24% – 11.99%|
|Ascent||3.38% – 14.50%||2.44% – 12.96%|
|CommonBond||3.74% – 10.74%||3.81% – 9.37%|
|Funding U||7.99% – 14.99%||N/A|
|LendKey||3.99% – 8.49%||1.49% – 7.69%|
|SoFi||4.23% – 11.26%||1.87% – 11.66%|
Refinance Student Loan Interest Rates
Student loan refinancing is the process of taking out a new loan from a private lender to pay off one or more of your student loan debts. You can combine federal and private student loans into a single loan program through refinancing with a private lender. Refinancing can be a smart way to manage your finances and take advantage of lower interest rates if you have good credit and a stable income.
Private lenders adjust their refinancing rates monthly or quarterly using the LIBOR.
|Lender||Fixed Rate APRs||Variable Rate APRs|
|College Ave||3.34% – 5.69%||3.24% – 5.54%|
|Earnest||Starting at 2.98%||Starting at 1.99%|
|Discover||3.49% – 6.99%||1.87% – 5.87%|
|CommonBond||2.59% – 6.74%||2.56% – 6.87%|
|LendKey||2.95% – 7.63%||1.91% – 5.25%|
|SoFi||2.99% – 7.33%||2.25% – 6.88%|
What Is the Average Student Loan Interest Rate?
The federal student loan interest rate for undergraduates is 2.75% for the 2020-21 school year. For Direct Unsubsidized Loans and Direct PLUS Loans, the rates are 4.30% and 5.30%, respectively.
Private student loan interest rates might be lower or higher depending on the lender, the type of loan, your credit score, and other factors. For instance, fixed rates currently range from 3.82% to 14.50%, and variable rates range from 1.20% to 12.99%. Refinanced student loans currently have a fixed interest rate ranging from 3.20% to 8.63% and a variable interest rate of 1.99% to 8.38%.
How Has the Coronavirus Pandemic Impacted Student Loans?
The coronavirus pandemic has brought uncertainty and questions regarding new and existing student loans. For federal loan borrowers, the office of Federal Student Aid is providing temporary relief on loans owned by the U.S. Department of Education. The measures started on March 20, 2020, and were recently extended until at least Sept. 30, 2021.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act comes with relief measures in the form of:
- Suspension of loan payments
- Stopped collections on defaulted loans
- 0% interest rate for federal student loans
- No late fees
- Interest will stop accruing
- Accrued interest from March 2020 will not be added to your loan balance
Private lenders are also offering COVID-19 student loan relief, but only if you request it. Depending on the lender, you may ask for temporary forbearance, get late fees waived, or temporarily stop negative credit reporting and debt collection activities, including wage garnishment.
With the world’s economy in disarray because of the coronavirus pandemic, interest rates have fallen to record lows for many financial products. When rates dropped for federal student loans, private student loan companies also lowered their interest rates on both fixed and variable products.
However, these interest rate cuts are for new loans only. If you already have a loan with the federal government, your interest rate won’t change. The same goes if you have a fixed rate loan from a private lender. You can take advantage of interest rate fluctuations only if you take out a new loan, have an existing variable rate loan, or refinance your current student loans.
Let CollegeFinance.com Help You Find the Right Student Loan
Interest rates for both federal student loans and private student loans are currently at record lows due to the effects of the coronavirus pandemic. Payments for federal loans owned by the U.S. Department of Education are temporarily suspended, and interest rates are reduced to 0%.
If you’re taking out a new loan, have an existing variable rate loan, or are refinancing your student loans, you might be able to take advantage of these lower interest rates. Be sure to exhaust your federal student loan options first before applying to private lenders, and remember that to qualify for private student loans or refinance, your credit score and income are taken into account.
Finding the right private student loans can feel overwhelming at times, especially when you consider the number of lenders you’ll need to compare. Before you take out a loan, it’s essential to note that you’ll be repaying the amount you borrow with interest. Consider how much you need to qualify for and rank lenders with the lowest interest rates and best borrower protections. You should also look at loan terms and which lenders have the fewest fees — late payment, prepayment, or origination fees.
At CollegeFinance.com, we help you find the best student loan provider for your unique situation. Whether you’re interested in refinancing your current student loans or are taking out a student loan for the first time, our goal is to help you make smart decisions about paying for your education.