Interest Rates on Student Loans
Student loans are meant to help individuals reach their higher education goals. Because of this, they usually have lower interest rates than other types of loans and debts. However, your exact interest rate depends on the type of loan you take.
Federal student loans come with low interest rates, especially if they are need-based. The federal government sets fixed interest rates for the various loans available to students. Privately funded student loans depend on your credit history and carry higher rates. However, these interest rates can still be significantly lower than other loan rates, such as credit card debt.
The interest amount is charged on the total amount owed on you. This means that as you repay the principal amount of the borrowed money, you are also responsible for paying any interest. That can add significantly to the total amount you owe, especially if you defer your payments and let interest accumulate before you start your repayment plan.
Interest rates for federal student loans
Federal student loan interest rates for the 2019-2020 school year range from 4.53% to 7.08%. As of July, 2006, all federal student loans have fixed interest for the life of the loan. Although rates are reevaluated by Congress each year, interest rates on existing loans will not be affected.
Stafford Loans for Undergraduates in 2019-2020 came with an interest rate of 4.53%. The rate for Stafford loans for graduate students is 6.08%. Stafford loans are the most common type of federal student loan. If your Stafford Loan is unsubsidized (based on financial need), it doesn’t start earning interest until you leave school.
Parents and graduate students may be eligible for PLUS loans, another type of federal student loan. At 7.08%, this has the highest interest rate of any federal student loan.
It should be noted that there is an overall limit to how much money students can borrow on federal loans. Undergraduates can borrow only $57,500 in total and no more than $23,000 of that can be subsidized loans. Graduate students can borrow up to $138,500 and no more than $65,500 can be subsidized.
Graduate loan amounts include any money borrowed to obtain an undergraduate degree.
Interest rates for private student loans
Interest rates on private student loans are almost always higher than federal loans, but with historically low lending rates offered in 2019-2020, the market has suddenly become more competitive.
It is important for students who have reached their borrowing limit on federal loans, but still need money to complete a degree. It also helps students with a good credit score or a co-signer with a good credit score can qualify for the lowest rates available from private lenders.
A survey of six lenders – SunTrust, Ascent, SoFi, CommonBond, Discover and Sallie Mae – showed fixed rates ranging from 4.29% to 12.49%, while variable rates were offered from 1.80% to 14.18%.
Prospective students should keep a close eye on interest rates if they are considering private student loans. If the available rates are 3% to 4%, it can be an attractive option compared to federal student loans.
Depending on your credit score and income, you can consolidate private student loans, potentially saving money on your monthly payment.
With a variable rate, however, you can start with a very low rate and end up in the double digits.
Federal student loans are funded by the government and credit scores are not a factor. Private student loans, on the other hand, are obtained from banks, credit unions, or online lenders, and credit scores are a big factor in determining interest rates.
While federal student loans have flat interest rates set by Congress, private student loan interest rates depend largely on your credit rating. If your credit score is below 690, you’ll likely pay a higher interest rate for a private loan than a federal loan. As with any loan, higher credit scores and income tend to get better rates and higher loan amounts.
Because they are student loans — and undergraduates may not have established credit or income — private student loans usually require a co-signer. In some cases, for borrowers without a co-signer, lenders will consider career and income potential when evaluating a loan.
How student loan interest rates are set
Since 2013, federal student loan interest rates have been set annually based on the 10-year Treasury note rate following the May auction (which was 2.13% for 2019-20).
The set margin is 2.05 percentage points for undergraduate student loans, 3.60 points for graduate student loans and 4.60 points for PLUS loans. Rates are fixed for the life of the loan, although rates for new loans are fixed every year.
Here are the calculations for 2017-18:
- Undergraduate Student Loan – 40 rate plus 2.05 percentage points equals 4.45% interest rate.
- Graduate student loan – 40 rate plus 3.60 percentage points equals a 6.00% interest rate.
- PLUS Loan – 40 rate plus 4.60 points equals 7% interest rate.
The current interest rate system was established in 2013, when President Barack Obama signed the bipartisan Student Loan Stability Act. After July 1, 2013, all annual percentage rates (APRs) for the 10-year U.S. were linked to treasury rates. The law also caps all Stafford loan rates at 8.25% (undergraduates) and 9.50% (graduate students).
The US Sen. Richard Burr (R-North Carolina) said the legislation has saved borrowers about $58-million in student loan interest since it was enacted.
How to Get a Federal Loan
You can get the lowest interest student loans by applying for federal loans. You must file the Free Application for Federal Student Aid (FAFSA), which is used by the federal government and most colleges and universities to determine the eligibility of a student applying for non-merit-based financial aid.
Filing the FAFSA form is the first step in applying for more than 90% aid amounts. Merit-based aid, which accounts for another 10%, is awarded on the basis of talent.
By filing the FAFSA, students can qualify for Pell Grants, Perkins Loans, federal work-study, and subsidized Stafford Loans. Graduate students may qualify for an unsubsidized Stafford Loan or PLUS Loan.
All applicants must:
- Be a US citizen, national or eligible non-citizen
- Demonstrate financial need
- Have a valid social security number
- Have a high school diploma or GED
- The US Register with the Selective Service (males 18-25).
- Be enrolled or accepted for enrollment in an eligible degree or certificate program
- Refunds are not due on federal student grants
- Don’t default on student loans
- Not guilty of selling illegal drugs while receiving federal assistance
The FAFSA includes approximately 130 questions regarding student and parent assets, investments, income, taxes paid, household size, and the number of dependent students in the family attending college or graduate school.
A student is considered a dependent and must include a parent’s information on the FAFSA unless he or she:
- 24 years old
- Enrolls in a graduate program
- Marriage takes place
- becomes an orphan or ward of the court
- Becomes a veteran of active military service
- Have one or more dependent children
The FAFSA requires detailed information about family finances. To verify the accuracy of submitted information, the Department of Education and college financial aid offices may request copies of income tax returns, W-2 statements, 1099 forms, or other documents. Families who refuse to provide the required documents are denied any form of federal student aid. On the FAFSA, students also identify the schools to which they are applying.
Prospective college students and their parents Oct. of the student’s senior year in high school. 1 to file a FAFSA submission. Previously, the filing date was January 1, but the law was changed permanently for the 2017-2018 school year. The FAFSA form must be completed no later than March 15, although many schools have earlier deadlines. Since some aid is provided on a first-come, first-served basis, colleges suggest that students submit their FAFSA as soon as possible.
Upon receipt of the FAFSA, the federal processor examines the information and enters it into the Federal Methodology (FM) formula, a complex analysis that determines the student’s Expected Family Contribution (EFC)—the dollar amount that the student and/or family must owe. Able to pay for Cost of Attendance (COA). If the EFC is less than the college’s COA, the student qualifies for need-based financial aid (COA — EFC = need). A student may be eligible for need-based aid at one college, but not at another.
Within three weeks after submission, the student will receive a Student Aid Report (SAR), which is a summary of the FAFSA. This information is also forwarded to all schools to which the student has applied, as well as to state agencies that provide need-based aid.
For each year that the student plans to attend college, he or she must fill out a new FAFSA. Each organization is likely to have its own deadlines. If the FAFSA is filed online, the previous year’s answers will be filled in automatically. Only updated tax and financial data will need to be added.
Management of loan costs
There are three ways to manage student loan costs.
- Apply for a scholarship or grant. This will limit your need to borrow at all. Every dollar of educational expenses that you can cover with scholarships or grants (instead of loans) will save you more in payments. But you must be committed to getting scholarships and grants.
- Pay as you go: If you can pay up front as you go to school — making sure the extra funds go toward principal and not extra payments — you should realize significant savings. Even if it’s a low-paying, on-campus job, every $1 you don’t borrow in federal loans actually saves you $1.24 (accounting for interest).
- Refinancing: Once you graduate, refinancing your student loans can lower your interest rates. When you have a career and steady income, this becomes an attractive option. It may be tempting at first to choose a variable interest rate or a longer repayment plan (which carries lower monthly payments), but a shorter payment plan will save you the most money. You can look into other plans, such as an income-driven repayment program or federal student loan forgiveness.