- Federal student loan interest rates are standardized for all who qualify, while private student loan rates vary based on eligibility.
- The higher your interest rate, the larger your monthly payment will be and the more you'll pay over the life of your loan.
- Fortunately, there are ways to reduce your student loan interest rate, including by refinancing.
Student loan interest rates reached record lows during the COVID-19 pandemic, but they're starting to rise again. If you're a college student or a parent of one who's thinking about taking out student loans—or a graduate looking to refinance existing education debt—here's what you need to know about the latest on student loan interest rates and how they work.
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Current rates for federal and private student loans
Interest rates for federal and private student loans are very different—more on those differences in a minute—so if you're thinking about borrowing money for college, it's crucial that you compare what's available.
Federal student loans
Federal student loans come with fixed interest rates that are standardized for all borrowers for each loan program. It's also important to note that federal student loans come with an upfront loan fee, which is deducted from your loan before it's disbursed.
For all student loans disbursed after July 1, 2022, and before July 1, 2023, here's what to expect:
|Loan program||Interest rate||Loan fee|
|Undergraduate subsidized and unsubsidized loans||4.99%||1.057%|
|Graduate or professional unsubsidized loans||6.54%||1.057%|
|PLUS loans for graduate and professional students and parents||7.54%||4.228%|
Private student loans
Whether you're looking for in-school loans or refinance loans, private lenders may offer variable and fixed interest rates. Instead of offering a single rate to all who qualify, like with federal loans, private lenders offer a range of interest rates, and yours will be based on your creditworthiness.
Among popular private student loan companies, here are the average student loan interest rates in July 2022:
|In-school student loans||Refinanced loans|
|Average variable rate||6.61%||5.02%|
|Averaged fixed rate||8.32%||5.25%|
*Averages according to 14 lenders’ advertised rates, as of July 22, 2022
Keep in mind that interest rates can vary for certain loan programs, such as loans for graduate students and parents. Additionally, your rate can vary based on your creditworthiness, whether or not you have a cosigner, whether or not you sign up for autopay and more.
Also, note that variable rates typically start out lower than fixed rates, but they can fluctuate over time, potentially resulting in higher costs over time.
"With most major nations expected to raise interest rates this year, possibly several times," says Kin Chung, a vice president at student loan provider MPOWER Financing, “the monthly payment on a [variable-rate] student loan after graduation could be significantly higher than the quoted monthly payment today."
How rates for student loans are determined
Student loan interest rates are calculated differently for federal student loans than they are for private loans.
With federal loans, Congress determines the interest rate annually for the upcoming school year. The legislative body bases the rate on 10-year Treasury notes and adds a margin based on the loan program.
With private student loans, including refinancing, lenders start with a benchmark rate, such as the prime rate or the Secured Overnight Financing Rate. Then, they add a margin based on your creditworthiness.
This process is called risk-based pricing, which means that borrowers with a solid credit history and a low debt-to-income ratio (DTI) tend to qualify for the best rates because they pose little risk. In contrast, if your credit history and DTI aren’t so strong, you may end up with a higher interest rate or even an outright denial.
"For a lender, the profit on a pool of loans is the interest received [minus] defaults and operational costs," says Chung. "Risk-based pricing is the adjustment of the interest rate based on the expected defaults for a group of loans."
If you can't qualify for a low interest rate on your own, you could enlist a cosigner with a good credit and financial background.
When shopping around for student loan interest rates, make apples-to-apples comparisons by comparing APRs among competing lenders. APR is a great measuring stick, because this Annual Percentage Rate accounts for the interest rate and fees, such as for origination.
How student loan interest rates impact your repayment
Interest rates represent the cost of borrowing, and they manifest as an annual percentage, which the lender uses to determine how much interest you pay every month.
Student loans typically accrue interest on a simple basis, which means that accruing interest doesn't compound on top of interest that's already accrued since your last payment. The lender only applies the interest rate to your principal balance.
Each month, a portion of your monthly payment will pay off the interest that's accrued since the previous month, and the remaining will pay down your principal balance. The higher your interest rate, the higher your monthly payment because more interest will accrue each month.
How to get a lower student loan interest rate
If you've graduated from college or you're a parent who borrowed on behalf of your child, you may be looking for opportunities to save money. Here are just a few to consider:
Get on autopay: Most federal loan servicers and private student loan companies offer a discount on your interest rate if you set up automatic payments. This discount is typically worth 0.25 percentage points.[2,6]
Refinance your loans: You can refinance both federal and private student loans with a private lender and potentially secure a lower rate than what you're paying right now. Keep in mind, though, that refinancing federal loans results in you losing access to federal benefits, including access to loan forgiveness programs and income-driven repayment plans. Also, you'll typically need at least great credit and a good salary to secure a low rate.
Should You Refinance Your Student Loans?
Should You Refinance Your Student Loans?
It’s not always just about getting a lower rate. We walk you through the factors to weigh before you decide on refinancing.Find out more
Look for loyalty discounts: As you shop around for refinance loans, consider working with your own bank or credit union. Some financial institutions offer interest rate discounts to existing customers.
Keep in mind that consolidating your federal student loans with the Education Department will not result in a lower interest rate. In fact, your new interest rate will be the weighted average rate of all the loans you consolidate, rounded up to the nearest one-eighth of a percent.