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The interest you’re charged on your student loan dramatically affects how much you’ll pay overall. Private student loans typically base your interest rate on your credit and financial history, while most federal student loans don’t even conduct a credit check to assign interest rates.
Here’s how student loan interest works, how rates are determined and what you can expect to pay after you borrow.
What Are Student Loan Interest Rates?
Interest is what you pay back your lender for taking out a loan. Your lender can be a bank, credit union or another institution, like the federal government.
Interest rates are not the same for all student loans. They differ between the few types of federal student loansand by private student loanlenders.
Current Student Loan Interest Rates
| Student loan type | Fixed or variable | Interest rate |
|---|---|---|
Federal direct subsidized and unsubsidized (undergraduate) | Fixed | 4.99% |
Federal unsubsidized (graduate or professional) | Fixed | 6.54% |
Federal direct PLUS (parent, graduate or professional) | Fixed | 7.54% |
Private student loans | Variable | About 1% to 12% |
Private student loans | Fixed | About 3% to 13% |
Refinanced student loans | Variable | About 2% to 9% |
Refinanced student loans | Fixed | About 3% to 9% |
While most student loans are granted at the federal level, some students need to borrow more or use other resources. Private student loans are a good option if you’ve exhausted all your federal funding through the Free Application for Federal Student Aid, or FAFSA.
When you complete the FAFSA, you’re approved for federal scholarships, grants, work-study opportunities and student loans. If you don’t complete the FAFSA or your expected family contributionis more than you can afford, you may need to apply for private student loans.
These types of loans come from banks, credit unions or online lenders. They tend to have higher interest rates compared to federal student loans. Plus, most private student loans don’t offer the same flexible repayment plans available from federal lenders, like income-driven repayment plans.
How Does Student Loan Interest Work?
Student loan interest usually begins accruing as soon as the loan is distributed to you or your school. If you don’t make any payments while you’re a student, your loan balance will grow during your time in school. The exception to this rule is federal subsidized loans. If you qualify for this type of loan, the government will pay your interest when your loan isn’t in active repayment.
Also keep in mind that the interest on your loans will capitalize, meaning that the accrued interest will be added to your loan balance. Essentially, you will begin accruing interest on your interest. Capitalized interest only occurs at certain times, and exactly when this will happen varies based on your loan. Often, interest capitalizes when your loan first enters repayment and after periods of deferment or forbearance.
How Student Loan Interest Rates Are Set
Federal student loans and private student loans set their interest rates differently.
Federal Student Loans
At the federal level, student loan interest rates are set by Congress. They are always fixed—not variable—and won’t change over the life of the loan unless you consolidate through a direct consolidation loanor your loans become private 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 need a PLUS loan, you’ll be subject to a credit check. If you have marks against your credit—like loans in default, repossession or bankruptcy—you might not get approved for a PLUS loan.
This is also important for parents who are taking out PLUS loans on behalf of their dependent child attending college. If you don’t have a strong enough credit score to qualify, you might not be able to get PLUS loans for your child.
Private Student Loans
If you need to take out private student loans, interest rates are based on your credit score and history. If you’re a student with very little—if any—credit to your name, you may have a hard time borrowing private student loans and might need a co-signer.
If you’re a co-signer for a student attending college, your credit score can be a determining factor in not only qualifying for a student loan but also getting the lowest interest rate available. The higher your credit score, the lower your interest rate. The lower your score, the higher your interest rate. Along with that, poor or fair credit could mean you can’t borrow as much as you need to pay for school.
Related:Best Private Student Loans
How to Calculate Student Loan Interest
Typically, interest accrues on your student loan daily. You can manually calculate how much interest you’ll pay each month with the following steps:
- Find your daily interest rate. You can do so by dividing your loan’s annual interest rate by the number of days in a year (365). If you borrowed $15,000 at 6% interest, the formula would be:
0.06 ÷ 365 = 0.000164 - Calculate your daily interest costs. See how much interest you’re charged each day by multiplying your current loan balance by your daily interest rate.
$15,000 x 0.000164 = $2.46 - Add up your monthly interest payment. Multiply your daily interest cost by the number of days in your billing cycle. The total is how much you’ll pay in interest each month.
$2.46 x 30 days = $73.80
As you pay down your loan balance, your monthly interest costs will also decrease. A student loan calculator can do the math for you and show you a more precise monthly schedule of interest costs as your balance goes down.
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How to Apply for a Student Loan
If you need money to pay for school, try to get as much free money as possible—that is, money you don’t have to repay. This comes through scholarships, grants and any money you or your family has saved for school. Once these resources are exhausted, you can apply for federal and private loans.
1. Complete the FAFSA
Start with federal student loans. These loans are the friendliest because they tend to have the lowest interest rates, don’t typically base your interest rate on your credit score and have plenty of repayment options. If the time comes to repay your student loans and you need a new plan, you have a lot to choose from, from the standard repayment planto the graduated repayment planand several income-driven repayment (IDR) plans.
To apply for student loans, complete the FAFSA. And, if you’d like to keep receiving money, you’ll need to complete a FAFSA every year you’re enrolled at least half-time. Because some student aid is first come, first served, the earlier you apply, the more aid you might get through scholarships and grants. If you’re a dependent student, your parents will need to have the last couple tax returns handy, as well as W-2s, pay stubs and asset information.
2. Research Private Student Loans
If you don’t have enough money to pay for school through free money and federal student loans, you may need to apply for private student loans. You can compare many different lenders before applying to see which ones offer the lowest interest rate, offer a grace period like federal student loans and offer help in case you can’t make payments.
Also see which lenders offer prequalification options that let you see your qualification chances without applying for a loan and triggering a hard credit check. Hard inquiries temporarily cause your credit score to drop and stay on your credit report, so you’ll want to limit loan applications until it’s necessary. If you apply for a private student loan and get denied, you’ll need to apply elsewhere, and you’ll still have a hard inquiry on your credit report. Apply with caution.
3. Apply for Private Loans
There isn’t a universal private student loan application; each lender has its own application process. You’ll need to complete personal and financial information. If you don’t have a strong enough credit history to qualify for a private student loan, find a co-signer that does.
A co-signer can help you qualify for a student loan if you don’t have a good enough credit score to qualify on your own. But when it comes time to repay your student loans, one missed payment can hurt both of you. Not only will your credit score drop, so will your co-signer’s score. Keep that in mind as you explore private student loan options.
Historical Student Loan Interest Rates
While private student loan rates vary greatly based on your creditworthiness and the lender’s policies, federal student loan interest rates are standardized. Everyone who qualifies for federal student loans gets the same fixed rate, regardless of their credit or financial history. Federal interest rates are set annually by Congress and take effect each July.
Here’s a look at previous interest rates on federal student loans:
| School year | Direct subsidized and unsubsidized (undergraduate) | Direct unsubsidized (graduate or professional) | Direct PLUS (parent, graduate or professional) |
|---|---|---|---|
| 2021-22 | 3.73% | 5.28% | 6.28% |
| 2020-21 | 2.75% | 4.30% | 5.30% |
| 2019-20 | 4.53% | 6.08% | 7.08% |
| 2018-19 | 5.05% | 6.60% | 7.60% |
| 2017-18 | 4.45% | 6.00% | 7.00% |
| 2016-17 | 3.76% | 5.31% | 6.31% |
| 2015-16 | 4.29% | 5.84% | 6.84% |
| 2014-15 | 4.66% | 6.21% | 7.21% |
| 2013-14 | 3.86% | 5.41% | 6.41% |
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Frequently Asked Questions (FAQs)
How do I reduce student loan interest rates?
A simple way to reduce student loan interest rates is to take advantage of discounts offered by the lender. For example, most student loan servicers offer a 0.25% interest rate reduction if you sign up for autopay.
If you hope to lower your interest rates more drastically, you have fewer options. Once you’ve signed your final loan agreement, you’re locked into the interest rates you agreed on. For fixed-rate loans, your rate is static and won’t change over your loan’s lifetime. For variable-rate loans, your interest rate will fluctuate according to market conditions—but you don’t get a say in what interest rate you’ll pay.
However, you could potentially reduce your interest by refinancing your student loan. With this strategy, you take out an entirely new loan to pay off your existing student debt. With your new loan, you can shop around for more desirable interest rates.
What is capitalized interest on a student loan?
Capitalized interest refers to the process of adding any accrued interest to your loan’s principal balance. When this happens, your loan balance grows and you begin accruing interest on the new, larger amount. Essentially, you are charged interest on your interest.
Interest only capitalizes during certain periods of your loan’s life—exactly when that happens varies based on your loan. However, it’s common for interest to capitalize when you first begin repayment and after any temporary deferment or forbearance.
How often does student loan interest compound?
Most student loans charge simple interest—meaning you’re only charged interest on your principal balance. Generally, you’ll be charged a daily rate of interest, which will stay the same throughout your repayment term.
However, there are some student loans (mainly private) that charge compound interest, which is when your accrued interest begins racking up its own interest fees. In some cases, even loans with simple interest can compound. For example, if you have a federal student loan in forbearance and don’t make payments during this period, the unpaid interest that accrues will be added to your loan balance—this process of compounding is also referred to as capitalization.
If you’re not sure how interest compounds on your student loan, contact your lender directly.
