How Do Student Loan Interest Rates Work?

How do the interest rates on your student loans compare to what everyone else is paying? And how does that interest rate affect your monthly payment?

Depending on the type of loan, taking on student debt today could put you above or below the average American student loan borrower. Being familiar with the interest rates set by the federal government is important, but it’s not the only factor to take under consideration.

You’ll also want to remember that federal loans come with many other advantages, such as income-driven repayment plans and potential student loan forgiveness.

How Student Loan Interest Rates Work

Your interest rate will depend in large part on when you are borrowing money and which type of loan you’re taking out.

Currently, there are three different types of student loans for which you may be eligible:

  1. Direct Subsidized Loans
  2. Direct Unsubsidized Loans
  3. Direct PLUS Loans

Each loan comes with its own individual interest rate, and that interest rate will differ depending on when the loan is issued.

Figuring out how your interest will affect your payments is actually easier than you may think. The federal government uses a simple interest formula to figure this out:

(Outstanding Principal Balance x Interest Rate Factor) x Number of Days Since Last Payment = Interest Amount

To find your interest rate factor, you divide your interest rate by 365. If you had an interest rate of 4.53%, your interest rate factor would be about 0.0001241. If you owed $50,000 in student loan debt and hadn’t made a payment in 30 days, your formula would look like this:

($50,000 x .0001241) x 30 = $186.15

You don’t have to do this math to make your monthly payments. The government will do it for you. But if you’d like to figure out how much of your payment is going towards interest vs principal, this formula can help you achieve just that.

Your result may be a few dollars off from the government depending on how you round the interest rate factor.

More Than Interest Rates: Repayment Options & Loan Forgiveness Plans

Before we delve into the current landscape of student loan interest rates, it’s important to note that interest rates aren’t the only factor to take under consideration when you’re taking on student debt.

Federal student loans also come with advantaged repayment plans and forgiveness options.

These extras often — though — not always make the federal government the best entity to borrow from.

Income-Based Repayment (IBR)

For example, one repayment option is Income-Based Repayment (IBR). Under this plan, you would pay either ten percent of your discretionary income or the amount you would normally pay under a Standard Payment Plan — whichever is less. After 20 years of repayment, the remaining balance would be forgiven.

Public Service Loan Forgiveness (PSLF)

Outside of advantageous repayment options are general loan forgiveness programs. Perhaps the most popular is Public Service Loan Forgiveness (PSLF).

Under this program, if you work for a government agency, 501(c)(3) or select other nonprofits, your debt will be forgiven after ten years of repayment.

You must be on an income-driven repayment plan, though, in order to qualify. If you’re not, your payments won’t count towards PSLF.

There are also forgiveness or cancellation programs for teachers, those facing total and permanent disability and those whose schools closed before they could complete their course of study.

Now that we have that out of the way, lets talk about the current student loan interest rates.

Current Federal Student Loan Interest Rates

While Direct Subsidized and Unsubsidized Loans have the same interest rates for undergraduates, the rate on Direct Unsubsidized Loans jumps up for graduate students. (Direct Subsidized Loans are not available to graduate students.)

It jumps up even higher for graduate students or parents taking out PLUS Loans.

Type of federal loanBorrower typeCurrent interest rate
Direct Subsidized OR Direct UnsubsidizedUndergraduate Student4.53%
Direct UnsubsidizedGraduate Student6.08%
Direct PLUSGraduate Student or Parent7.08%

Private Student Loan Interest Rates

You may be able to find lower interest rates on the private market, but remember that these private student loans do not come with all the advantages of a federal student loan.

You’re unlikely to have access to liberal repayment programs, and you will likely have to start repayment while you’re a student.

With that in mind, here are the current best offers on the market for private student loans.

LenderFixed Interest RateVariable Interest Rate Offer
Sallie Mae4.74% – 11.35% APR3.25% – 10.65% APR
College Ave4.72% – 12.94% APR3.70% – 11.98% APR
Common Bond5.45%-9.74% APR3.52%-9.50% APR
LendKey5.36%-11.24% APR4.27%-11.59% APR
Ascent3.97% and 12.93%3.63% and 12.90% APR
SoFi5.05% – 11.71% APR3.52% – 11.12% APR
Earnest4.69% – 12.78%3.35% – 11.44%
Discover4.74% – 12.99%3.37% – 11.87%
Citizens Bank4.72% – 12.04% APR3.24% – 11.35% APR

Average Student Loan Interest Rates

student loan interest ratesA 2017 study by New America revealed that the average student loan interest rate in America was 5.8% at the time if the borrower had never refinanced. If they had, the average interest rate dropped to 4.2%.

If you’re taking out new loans today, the only way you’re going to get close to those numbers through federal loans is if you are an undergraduate student taking out Direct Subsidized or Direct Unsubsidized Loans.

To give you an idea of what this looks like, those with a 5.8% interest rate repaying $150,000 with a Standard Repayment Plan would see their monthly payments around $1,650.

If you borrowed with a Direct Subsidized or Unsubsidized Loan today as an undergraduate student, your monthly payments would only be around $1,557. On top of that, over the course of your loan, you would have paid $11,224 less in interest than the average borrower.

How to Lower Your Student Loan Interest Rates

There are ways to lower your student loan rates, but these methods may not be in your best interest.

One option is consolidating your federal student loans with the Department of Education. The interest rate on consolidated loans is figured out by averaging the interest rates of your current loans.

If you had one loan with an interest rate of 6.8% and another at 4.53%, the new interest rate on your Direct Consolidated Loan would be 5.67%.

If you don’t think consolidation makes sense, you may look to refinancing on the private market. If you have good credit and a high income, you’re likely to qualify for some of the best rates on the market, which beat out current federal rates.

However, you’ll also be giving up advantaged repayment programs extended to you through the government. You are also likely to have to repay your student loans while you’re still working on your education.

How to Consolidate Your Federal Student Loans

Before you even start down the path of consolidation, the Department of Education wants you to know one thing: You should never have to pay to apply for student loan consolidation with the federal government.

While there are companies out there that would help you file your application for a fee, there’s no reason you can’t do it yourself for free.

If you decide consolidation is the path you want to take, you can start the process by filling out an online application. You also have the option to print this application and mail it in if you’re uncomfortable completing the process online.

If you have any questions, ask them before you fill out the application by calling the Student Loan Support Center at 1-800-557-7394.

How to Refinance Your Student Loans on the Private Market

If you’re 100% comfortable giving up access to programs like PSLF and IBR, you may consider refinancing your student loans. Before you refinance, you want to make sure you’re getting the best possible deal by shopping around.

You can do this by going to each individual lender and applying, or you can use a service like Credible, which does all the shopping around for you, finding you the lowest rates all in one fell swoop.

Are the Interest Rates on Student Loans a Good Deal?

Since 2016, student loan interest rates have been going up. That doesn’t mean they won’t dip back down again; we see a cycle of a couple of years of growth followed by a year of regression when we look at interest rates on federal student loans since the Recession.

In fact, undergrads taking on Direct Subsidized or Unsubsidized Student Loans today are likely to pay far less in interest than those who initiated their loans immediately prior to or during the economic downturn.

New rates will be announced next July when they are set for the 2020-2021 school year. Whether they go up or down, it’s important to remember that interest rate alone does not make a loan; it’s important to consider other factors like repayment plans and potential loan forgiveness, too.

Brynne Conroy

Brynne Conroy

Brynne Conroy has been writing about personal finance, investing and student loans for 8 years. Her writing has been featured on Student Loan Hero, The Penny Hoarder, Lending Tree, Mint, and Business Insider. She's the author of The Feminist Financial Handbook.
Brynne Conroy

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