What’s a Reasonable Interest Rate for Student Loans?

Written by: Kristyn Pilgrim
Updated: 1/10/20

There are two types of lenders for student loans:

  • The federal government and the U.S. Department of Education, which distributes federal student loans 
  • Private financial institutions that offer private student loans

Typically, federal student loans have the most favorable interest rates and repayment terms. Federal student loan interest rates are set by Congress for each school year. Once you borrow, the rates remain set for the life of the loan. 

Private student loans can be either fixed or variable. Average interest rates can range from 3.95% annual percentage rate (APR) to 14.28% APR. Variable-rate loans can change over the life of the loan.

Private student loan rates vary based on your personal credit history and rating, the type of loan and repayment options you choose, and your debt-to-income ratio.

The better your interest rate, the less money you will pay over the life of your loan. 

Trends in Student Loan Interest Rates

For federal student loans, interest rates are evaluated and set by Congress for each academic year. The state of the economy can impact these national interest rates.

  • Direct subsidized federal loans are provided to undergraduate students demonstrating financial need. They typically have some of the lowest fixed interest rates. 
  • Direct unsubsidized federal loans do not require you to demonstrate financial need, and they can be taken out by undergraduates and graduate students alike. These loans usually have slightly higher interest rates than subsidized loans.
  • Direct PLUS loans have the highest interest rates for federal student loans. They can be taken out by parents of undergraduate students or graduate students directly.

Over the past decade, interest rates for federal student loans dropped significantly. However, after a significant dip in 2016 and 2017, they started to climb steadily again.

Private student loan rates are also impacted by the state of the national economy. Lenders compete with each other to offer favorable rates.

What’s a Good Interest Rate?

The average interest rate on student loans is currently 5.8%. This includes all student loans.

You can usually get the lowest possible interest rate on variable-rate loans. These will start out the lowest, but they can increase throughout the life of your loan. A fixed-rate loan will remain the same for your entire loan term. 

Student loan interest rates are typically significantly lower than credit card interest rates, which can range as high as 15% to 20%. However, the interest rates on student loans are slightly higher than average mortgage rates (3%) and auto loan rates (4.5%).

While private loans with variable interest rates can have some of the lowest interest rates, they can also change. As a result, you may end up paying more over time.

Federal interest rates are generally considered to be some of the most favorable. For loans disbursed between July 1, 2019, and July 1, 2020, these are the rates:

  • Direct subsidized loans: 4.53%
  • Direct unsubsidized loans for undergraduates: 4.53%
  • Direct unsubsidized loans for graduate or professional students: 6.08%
  • Direct PLUS Loans: 7.08%

According to loan interest average, a good interest rate is anything between 4% and 7%. Anything 10% or higher is considered a poor rate. 

Factors That Impact Interest Rates

Reasonable rates for student loans depend on the:

  • Type of loan you take out
  • Kind of borrower you are (financial standing or student versus parent)
  • Length of loan term
  • Loan amount
  • Repayment terms and monthly payments
  • Lender

To get the best rates on federal student loans, a direct subsidized loan is the optimal option. To qualify, you need to be an undergraduate student enrolled in school at least half the time. The U.S. Department of Education pays the interest on your loan as long as you are in school (and during your six-month grace period upon leaving or dropping below half-time status).

Private student loans require a credit check, and interest rates depend on your financial status. A credit report will need to be run, and you will need to have excellent credit for the best rates. You will also need to show reliable income and stable employment: The lower your debt-to-income ratio, the better.

As a student, you may not yet have good, or any, credit. You may need a co-signer with a good credit history to get good interest rates.

You can also get lower interest rates by:

  • Taking out less money
  • Choosing a shorter repayment timeline
  • Making higher monthly payments
  • Paying on your loan immediately
  • Enrolling in autopay
  • Holding an account at the bank or financial institution where you take out your loan

Ultimately, the less money you take out and the shortest time frame you need to pay it back, the better your rates will be. 

Credit unions, and sometimes online lenders, can often offer lower interest rates to members. Credit unions are not-for-profit institutions, and they generally require a membership to obtain a loan.

Credit unions can be more personal and willing to loan to people with bad credit. They may take different things into account, like potential future earnings and education, as opposed to merely your credit score.

Refinancing to Adjust Rates

If you already have a student loan with a relatively high interest rate, you may be tempted to refinance to a lower interest rate loan that you have seen advertised. You may not want to refinance a federal student loan, as that can knock out federal loan benefits, including flexible repayment plans and forgiveness programs.

If you have private student loans with a rate greater than 10%, you may want to refinance for a lower rate. If you have a variable interest rate loan, it can be wise to lock in a fixed rate. 

Refinancing does not always lower your interest rate, although it can reduce your monthly payments. Refinancing student loans often lowers the monthly payment by increasing the length of your repayment term, or the time you have to pay the loan back. Your interest rate may not be lowered very much, or at all, and you may then end up paying more in the long run.

The best way to get excellent rates on a student loan refinance is to have a high credit score of 680 or greater, solid employment, and an income of around six figures. If you don’t fit these criteria, you may not be eligible for the lowest advertised rates. Applying for a refinance can then drop your credit score a little.

When looking to refinance, there are some preapproval tools you can try online. These won’t ding your credit, and you find out if you can get a lower rate on your student loans before actually applying for a refinance.