Guide to Student Loans Interest Rates

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Point of Interest

You have several options for student loans when taking college classes. Student loan interest rates will vary based on loan structure — and the lowest rates are generally associated with federal loans that have the strictest qualifications.

Like many other loan types, student loans interest rates can vary from year to year and lender to lender. This can make it challenging to shop for the best student loan, especially because what a good student loan interest rate is for some students might not be a good fit for others. Since interest rates are primarily affected by the type of loan offered, students should start by understanding the different types of loans and eligibility criteria for each.

Types of student loans

Not all student loans are created equally, and not all students will qualify for all student loan programs. For each type of student loan, it’s important to identify the eligibility requirements, maximum loan amounts, and repayment terms after graduation. Each loan type will also have unique pros and cons that can help match the right loan for each student.

Direct Loans

Direct loans provide funds to help students cover the cost of their education, and they are made directly from a lender to the student without a third-party middleman. Technically, direct loans can originate from any lender that will lend directly to a borrower, but when most people discuss “direct loans,” they are referring to federal direct loans. These loans are made from the U.S. Department of Education directly to students through the William D. Ford Federal Direct Loan Program. There have historically been many different types of federal student loans offered, but the Federal Direct Loan Program is the only federal student loan program that is currently available to students.

Pros

  • Direct loans are generally faster – Since there is no middleman, these loans are processed faster than other types of student loans.
  • Direct loans have fixed interest rates – Many private loans will have variable interest rates that can change from month to month. With federal direct loans, the interest rate is set for the life of the loan, or until it is consolidated.
  • Direct loans offer borrower protection – If your income decreases, the direct loan program provides several protections in the form of temporary forbearances, income-driven repayment plans or consolidations.

Cons

  • There are limitations on the amount borrowed – Regardless of the cost of your education, the federal government sets limits on the amount that can be borrowed each year and for the entirety of your college career. Students who attend more expensive schools may not be able to cover the entire cost of their tuition with direct loans alone.
  • There is no statute of limitations on repayment – Until the loan is paid in full, the federal government can demand payment on the loan as long as the borrower is alive. Direct loans generally can’t be dismissed in bankruptcy, and the government can garnish wages and tax refunds in order to secure repayment.

Subsidized loan

A subsidized loan is offered by the federal government to undergraduate students who demonstrate financial need and attend school at least half-time.

TIP: For undergraduate students, subsidized loans have lower interest rates and better repayment terms than unsubsidized loans. To finance your education cheaply, take out the maximum you are eligible for in subsidized loans before accepting any unsubsidized loans.

Pros

  • Accrued interest is covered during certain periods – If you are in school or left school within the last 6 months, any interest that accrues on your loan will be paid by the U.S. Department of Education.
  • Includes a grace period after graduation – Unlike many private student loans, a federal subsidized loan offers a 6-month grace period during which the borrower does not have to make any loan payments. This grace period begins after graduating or when dropping below half-time status.
  • Credit checks are not required – There is no credit check to qualify for a federal subsidized loan, so borrowers with credit challenges can still get money to cover education costs.

Cons

  • Eligibility is based on financial need – High-income households will generally not qualify for subsidized loans, and low-income borrowers are limited to borrowing only the amount of need demonstrated on the Free Application for Federal Student Aid (FAFSA) form each year.
  • Only available to undergraduate students – Since graduate degrees are not considered a necessity, subsidized loans are only available to students in undergraduate programs.

Unsubsidized loans

An unsubsidized loan is offered by the federal government to either undergraduate or graduate students who are in school at least half-time. There is no requirement to demonstrate financial need.

Pros

  • Graduate students can qualify – It can be challenging to finance a graduate education, but unsubsidized loan money can be used toward graduate tuition and fees.
  • Includes a grace period after graduation – Like subsidized loans, unsubsidized loans also offer a 6-month grace period, during which students are not required to make loan payments, but interest does still accrue on any unsubsidized loan balance during this grace period.
  • Eligibility is not based on financial need – Although the FAFSA form is still required to remain eligible, there is no income requirement or requirement for requisite financial need to take out an unsubsidized loan.

TIP: If you are preparing to enter a graduate degree program, the only federal loans available to you are unsubsidized loans. If you need loans to cover the cost of this program, compare your private student loan rates to the current federal unsubsidized interest rate when weighing your options.

Cons

  • Loan interest begins accumulating immediately – As soon as funds are disbursed, interest begins accumulating on the unsubsidized loan principal, even while a student is still attending school.
  • Interest rates are higher on graduate loans – While some private loan companies may not distinguish between student loans for undergraduate vs. graduate degrees, federal unsubsidized loans for graduate programs carry interest rates that are typically 1% to 2% higher than those for undergraduate programs.

Types of student loan interest rates 

Financing a college education is a game of numbers, and the goal is to get a quality education for the least amount of financing costs. After exhausting grants and scholarships, many families turn to student loans to cover any amount remaining. Before automatically taking out the maximum in student loans, consider the pros and cons of each loan rate type.

Federal student loan rates

Federal student loan rates are set by the U.S. Department of Education and are based on the U.S. federal prime rate. These interest rates are fixed for the life of the loan unless a borrower chooses to refinance or consolidate. The interest rates are not dependent on credit scores.

Pros

  • Lower fixed interest rates than those available through private programs
  • Easier qualifications and loan processing
  • Eligibility for student loan forgiveness programs
  • Eligibility for borrower protection and income-based repayment options

Cons

  • The federal government can garnish tax refunds and wages if loans enter default
  • No interest rate discounts for borrowers with excellent credit
  • Limitations on the total amount of money borrowed through the federal student loan program

Private student loan rates

Private student loans are education loans offered by private banks and financial institutions. These lenders set their own repayment terms, interest rates, and loan amounts, and most will use credit history as a deciding factor before approving the loan. Private student loans can come with fixed or variable rates, so check with your lender on the type of interest rate before finalizing the loan.

Pros

  • Borrowers with good credit are rewarded with lower interest rates
  • Some private lenders may offer special programs for students who already have accounts
  • Can borrow up to the entire cost of education, including the cost of housing, books, and additional fees

Cons

  • Higher interest rates than federal student loans
  • Interest rates may change on variable rate loans
  • No access to forbearance or loan forgiveness programs

Average student loan interest rates 

Over the past 10 years, federally subsidized loans have fixed interest rates ranging from 3.40% to 5.60%. The current interest rate on federally subsidized loans disbursed between July 1, 2019 and June 30, 2020 is 4.53%. For unsubsidized loans, the previous 10-year rates ranged from 3.76% to 6.8%, and the current rate for federal unsubsidized loans is 6.08% for loans disbursed between July 1, 2019, and June 30, 2020. For private student loans, interest rates can vary based on the lender, loan amount and credit score. A recent survey across six popular private lenders showed interest rates ranging from 1.8% to 14.18%.

How to choose a student loan 

To determine which type of student loan is best for you, start by outlining the amount you need to borrow. If you only need a small amount to cover a portion of tuition and books, a federal loan can likely help you bridge the gap. If you need financing that can cover your entire cost of tuition plus additional living expenses while in school, you may need to obtain multiple loans from both federal and private sources. Whichever type of loan you choose, consider the interest rates and terms available for each option and borrow from the least expensive loans with the most flexible repayment terms first.

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Julia Taylor

Personal Finance Contributor

Julia Taylor is a freelance writer based in Nashville, TN. She takes complex business, financial, and technical topics and makes them easy to understand. You can find her work published on a variety of business blogs, including Paychex, Kapitus, Sanford Brown, Fortis Educational Institutes, American University of Antigua and Interest.com. She also earned her Bachelor’s degree in Business from the University of Tennessee and her MBA from Tennessee Tech University. When she’s not working on her next writing piece, you can find her working in the yard or spending time with her three teenaged children.