Student Loan Interest Rates: What is the Best Type to Choose?

Student loan interest rates are the percentage of the loan amount assessed, either fixed or variable. Variable interest rates begin cheaper but change based on market circumstances. Loan type, credit score, and present market rates impact the rates. A student loan covers living expenses, books, supplies, and tuition and is repaid after graduation. The student loan interest rates are the percentage that student loan lenders use to calculate each month’s balance owed on top of outstanding student loans. It is charged as a percentage of the loan principal, the amount borrowed.

Student loans include federal student loans and private student loans. Federal student loans, funded by the federal government, offer lower interest and fixed rates, protecting against unexpected monthly payments. Private student loans, provided by private institutions, offer low interest student loans and a simplified application process, with interest rates varying depending on the lender.

Federal student loans are lower and fixed, with interest rates ranging from 4.49% to 9.08% for 2024-2025. It offers deferment and no interest accrual while in school. Federal student loans are accessible to a broader range of students and offer predictability in repayment amounts. Private loan interest rates require a credit check and a co-signer for borrowers with limited or poor credit histories. The federal student loans interest rate offers borrower protections, such as income-driven repayment plans, deferment, forbearance, and loan forgiveness programs, making them less flexible.

What is a Student Loan Interest Rates?

Student loan interest rates are the percentage of the loan amount charged for borrowing money, either fixed or variable. Variable rates start cheaper but change depending on the state of the market, whereas fixed rates are fixed for the duration of the loan. The loan type, credit score, and current market rates influence the loan prices. Calculate debt before taking out a loan to ensure manageability post-graduation.

A student loan is a contract in which students borrow funds from a bank to cover living expenses, books, supplies, and tuition for their education. Federal, state, or private institutions provide the funds for the student loan, which must be repaid after graduation along with interest. A student loan is intended to assist students in paying for post-secondary and related expenses.

How does Student Loan Interest Work?

Student loan interest works by computing the interest daily, multiplying the remaining principal by the interest rate factor. Lenders impose fees for borrowing funds, and student loan interest starts to accrue when the debtor carries out the loan. A fixed interest rate is applied for many loans, including government loans, and remains unchanging while the borrower repays the loan. The daily interest rate on a student loan must be multiplied by the number of days since the last payment and the size of the loan to get the monthly interest that is going to accumulate.

The borrower pays off the entire amount of interest accumulated each month. There are situations where delinquent interest accrues and is capitalized, raising the loan’s overall cost. Federal and private student loans are the two primary categories. Banks, credit unions, and online lenders offer private student loans, while the U.S. Department of Education offers federal loans with fixed interest rates. Understanding how student loan interest works helps make informed decisions regarding repayment. Interest accrues over time based on the loan’s principal amount and interest rate.

What are the Interest Rates for Different Types of Student Loans?

The interest rates for different types of student loans are listed below.

• Federal Student Loan: The U.S. government provides federal student loans to eligible students or their parents/guardians to cover the cost of higher education. The interest rate for a Federal Student Loan is fixed by the U.S. government and set annually by Congress based on the high-yield value of 10-year Treasury notes. The rates are set on July 1 each year for loans disbursed from July 1 to June 30 of the following year.
  
  The different types of federal student loans are listed below.
  
  • Direct Subsidized Loans: Direct subsidized loans are federal student loans for financially needy undergraduates. The interest rate is 6.53% for 2024-2025. The federal government subsidizes the loan by paying interest while the student is in school at least half-time, during qualifying deferments, and the six-month grace period following graduation.
  • Direct Unsubsidized Loans: Direct unsubsidized loans for undergraduate and graduate students at four-year colleges, universities, community institutions, and trade, career, and technical schools. The interest rate is 6.53% for undergraduates and 8.08% for graduates for 2024-2025. Borrowers must pay interest from the first loan disbursement until the loan is paid off.
  • Direct PLUS Loans: Direct PLUS loans help graduate or professional degree students and parents of dependent undergraduate students pay for school. The interest rate is 9.08% for 2024-2025.
  • Grad PLUS Loans: Grad PLUS loans allow graduate and professional students to borrow money for education not covered by grants or financial aid. It comes with a fixed interest rate of 9.08% for 2024-2025.
  • Parent PLUS Loans: Parent PLUS loans let parents of dependent undergraduate students borrow up to the full cost of attendance to cover costs not covered by financial aid. The interest rate is 9.08% for the first disbursement between July 1, 2024, and June 30, 2025.
  • Direct Consolidation Loans: A direct consolidation loan combines federal college loans into one fixed-rate loan. The new fixed interest rate is the weighted average of the borrower’s previous rates, rounded to the nearest one-eight of 1%. The loan forgives loans and reduces monthly payments for most federal loans.
• Private Student Loan: Banks and lenders offer student loans with fixed or variable interest rates. The rate depends on credit score, income, loan amount, and term. Loans with longer terms have higher interest rates than loans with shorter terms.

The different types of federal student loans are listed below.

• Undergraduate Loans: Undergraduate loans offer fixed or variable interest rates, stricter eligibility requirements, and require an application. A private student loan is among the types of student loans where the interest rate varies based on the lender’s and borrower’s creditworthiness.
• Graduate Loans: Private lenders offer graduate loans with fixed or variable interest rates based on the borrower’s creditworthiness. These loans suit graduate students and require a credit check and co-signer. Credible is one of the best private student loans of July 2024, with a fixed APR of 3.79% to 17.99% with autopay. The variable APR ranges from 5.37% to 17.99%.
• Parent Loans: Private lenders offer parent loans to parents or guardians to finance their dependents’ education. The loans have fixed or variable interest rates, depending on the borrower’s creditworthiness.

1. Federal Student Loan

Federal student loans are financial aid funded by the federal government to help students cover post-secondary education expenses. The loan covers tuition, fees, books, lodging, and board. It has fixed interest rates, protecting against sudden increases in monthly payments. The advantages of federal student loans are accessibility without requiring a credit history or co-signer, fixed and lower interest rates, and interest not accruing for students with financial need.

The types of federal student loans are listed below.

• Direct Subsidized Loans: Direct subsidized loans are federal student loans open to qualified undergraduates with monetary needs. The federal government pays interest while the debtor is in school and during deferment duration. The loan presents lower fixed interest rates and flexible repayment alternatives. Key features include interest-free registration and a six-month grace period, with borrowing limits based on school year and dependent or independent student status. Undergraduate students who meet requirements include being enrolled half-time in a Federal Direct Loan Program school and making satisfactory academic progress. Students who do not default on previous federal loans, receive government interest assistance, and have different loan limits for graduate and undergraduate students benefit from direct subsidized loans.
• Direct Unsubsidized Loans: Direct unsubsidized loans are federal student loans available to undergraduate and graduate students. It does not require a financial need demonstration. Interest starts accumulating from the date of the first loan, unlike direct subsidized loans based on financial need. The loans accrue interest from the date of disbursement until complete payment. Direct unsubsidized loans offer interest accrual, no need requirement, and higher borrowing limits, making the loan accessible to a broader range of students and not based on financial need. Direct unsubsidized loans benefit students enrolled in Federal Direct Loan Programs who maintain satisfactory academic progress, are not in default, and are not eligible for need-based loans.
• Direct PLUS Loans: Direct PLUS loans are federal loans for graduate or professional degree students or parents of dependent undergraduate students to cover education expenses. It has a fixed interest rate and is not subsidized, with interest accruing while the student is enrolled. Direct PLUS loans are unsubsidized, have no requirements, and offer higher borrowing limits, allowing students to borrow up to the full cost of attendance. Direct PLUS loans benefit graduate, professional, or dependent undergraduate students enrolled at least half-time at a Federal Direct Loan Program school.
• Grad PLUS Loans: Grad PLUS loans are federal loans for graduate and professional students to cover tuition, room, board, and other expenses not covered by other financial aid or grants. The loans require a credit check, have higher interest rates, and allow borrowing up to the total graduate school cost minus other aid. Grad PLUS loans require a completed Free Application for Federal Student Aid (FAFSA) and a credit check, with a maximum borrowing limit of the school’s cost of attendance, excluding financial assistance. Grad PLUS loans are beneficial for graduate or professional students enrolled in the Federal Direct Loan Program, maintaining satisfactory academic progress, not in default, responsible for interest, and not need-based.
• Parent PLUS Loans: Parent PLUS Loans are federal student loans offered by the U.S. Department of Education to parents of dependent undergraduate students. It aims to help pay for additional expenses not covered by the financial aid package. The borrower must be a biological or adoptive parent, pass a credit check, and meet eligibility requirements. Parent PLUS Loans are federal student loans that offer fixed interest rates, a borrowing limit, flexible repayment plans, and a deferment option for parents to cover attendance costs. Parent PLUS Loans provide flexible repayment options for struggling parents, are costly, and have harsh consequences for default. Consult a financial advisor before making a decision.
• Direct Consolidation Loans: Direct consolidation loans consolidate multiple federal education loans into a single, fixed-interest payment. The loan simplifies repayment and offers additional repayment methods and forgiveness programs managed by the U.S. Department of Education. Direct consolidation loans merge multiple federal student loans into one, offering fixed interest rates, flexible repayment programs, and loan forgiveness alternatives. Direct consolidation loans are valuable for eligibility issues, extending repayment periods, and increasing interest.

2. Private Student Loans

Private Student Loans are loans private institutions offer to finance college-level coursework and degree programs. They offer lower costs for creditworthy borrowers and a streamlined application process. Interest rates for private types of student loans vary depending on the lender. Student loans offer higher borrowing limits and lower interest rates than federal loans, faster application processes, and tax deductions.

The types of private student loans are listed below.

• Undergraduate Loans: Undergraduate loans, offered by federal and private lenders, are installment loans for college expenses, including tuition, fees, textbooks, and living expenses. They require a co-signer due to undergraduates’ lack of credit history and have higher interest rates than graduate loans. Taking an undergraduate loan is beneficial when the benefits outweigh the costs. It is a good investment in the future, a way to secure a degree and a well-paying job, and a viable option after insufficient grants and scholarships.
• Graduate Loans: Graduate loans, or Grad PLUS Loans, are loans designed for graduate studies, such as master’s, Ph.D., law, MBA, or medical degrees. The loan covers tuition, fees, books, supplies, housing, and other expenses. Graduate loans are private student loans that offer higher interest rates. It requires a credit check, allows borrowing up to full graduate school cost, offers multiple repayment options, and is eligible for loan forgiveness programs. Graduate loans provide favorable conditions for students with limited cash, maxed-out federal unsubsidized loans, good credit, or financial institution affiliations.
• Parent Loans: Parent loans are federal and private options for parents to help pay for their dependent’s education. Parent loans allow qualifying applicants to borrow the total cost of their dependent’s attendance minus other financial assistance. Parents consider private student loans for better interest rates. Parent loans are private student loans that require a credit check and offer loan limits up to the total cost of attendance with fixed interest rates. The loan provides various repayment plans and is deferred while the student is enrolled at least half-time. Parent loans benefit parents with exhausted federal loans, unsatisfactory credit, a comfortable sense of responsibility, and a steady income.

How do Interest Rates Compare Between Federal Student Loans and Private Student Loans?

The comparison of interest rates between federal student loans and private student loans is that federal student loans are lower and fixed, while private student loans are higher. The government offers federal student loans through banks, credit unions, and online lenders. Federal loans benefit borrowers by providing better perks than private loans. Federal loans require the Free Application for Federal Student Aid (FAFSA), which organizes financial and family details to establish eligibility.

Federal student loans feature low, fixed rates regardless of credit score or revenue. Federally subsidized and unsubsidized student loans have rates of 4.49% to 9.08% from 2024 to 2025. Federal student loans offer higher borrower benefits, including up to three years in deferment and forbearance and no interest accrual while in school. 

Federal student loans have fixed interest rates, provide predictability in repayment amounts, and are accessible to a broader range of students. Private loans require a credit check and a co-signer for borrowers with limited or poor credit histories. Borrowers must understand the differences and compare the interest rates between federal student loans and private student loans before deciding. Private student loan interest for the 2024 to 2025 school year ranges from 4% to 17%, based primarily on creditworthiness. Federal loans offer various borrower protections, such as income-driven repayment plans, deferment, forbearance, and loan forgiveness programs, making them less flexible. 

How do Interest Rates Compare Between Subsidized Loans and Unsubsidized Loans?

The comparison of interest rates between subsidized and unsubsidized loans is that subsidized loans’ interest is lower than that of unsubsidized loans. The government pays the interest on subsidized loans while the debtor is in school during the grace and deferment duration.

Subsidized and unsubsidized loans are part of the federal direct loan program, with diverse eligibility prerequisites and interest accrual methods. Subsidized loans are available to undergraduate students who exhibit financial need, and the U.S. Department of Education pays the interest. Unsubsidized loans are available to undergraduate and graduate students, regardless of financial need, with interest accruing from the first loan disbursement. 

Direct subsidized loans are available to undergraduate students with financial need, with the government covering interest during specific periods. Subsidized loans and unsubsidized loans charge the same interest rate for undergraduate students, but graduate or professional students take out unsubsidized loans at higher rates. Subsidized loans offer favorable terms and lower interest rates, while unsubsidized loans are available to a broader range of students but have higher interest rates.

What Are the Typical Interest Rate Ranges for The Best Private Student Loans Available Today?

The typical interest rate ranges for the best private student loans available today range from 3.79% APR to 17.99% APR for fixed-rate loans and 5.37% to 17.99% for variable-rate loans. Private student loans present a range of interest rates influenced by creditworthiness, loan duration, and lender procedures.

The best rates as of July 2024 for fixed-rate loans range from 3.79% APR to 17.99% APR, providing predictable monthly payments. Variable-rate loans have interest rates today ranging from 5.37% to 17.99%, which change over time based on market conditions. The best private student loan rates are available to borrowers with excellent credit, while higher rates apply to borrowers with lower scores. The terms and conditions of the loans, such as repayment and grace periods, affect the cost. Borrowers must consider financial stability, risk tolerance, and future rate changes when choosing between fixed and variable rates.

The rates are subject to change based on the borrower’s income, credit score, and whether a cosigner is present. Compare rates from multiple lenders to find the best option. Autopay comes with a small discount on the interest rate. Private student loans offer a solution to the college funding gap, but they charge higher interest rates and have fewer borrower protections than federal student loans. Explore options for federal financial aid before shifting to private student loans.

What are the Best Student Loan Interest Rates?

The best student loan interest rates are listed below.

• Federal Direct Subsidized Loan: Federal direct subsidized loans are offered to undergraduate students with financial needs. They have lower interest rates and government payments during school hours. The loan is the best option due to its favorable interest rate conditions, with the 2024-25 academic year interest rate being 6.53%. The loan cost is lower than other types of student loans, where interest accrues from the date of disbursement. Other benefits include flexible repayment options and access to forgiveness programs.
• Federal Direct Unsubsidized Loan: The U.S. Department of Education offers undergraduate and graduate students a federal direct unsubsidized loan. The interest rate is higher than subsidized loans, with a fixed rate of 6.53% for undergraduate students and 8.08% for graduate and professional students. The rate predicts repayment amounts and offers flexible repayment options and access to forgiveness programs.
• Private Student Loan: Private student loans are offered by private lenders to cover educational expenses. The loans are among the best student loan rates, ranging from 4% to 17%. Private student loans are not part of the federal student loan program and do not offer the flexible repayment terms or borrower protections offered by federal loans. Private student loans are used for tuition and fees at various institutions, including two-year colleges, four-year institutions, trade schools, and adult education centers.

Which Student Loan has the Lowest Interest Rate?

The student loan with the lowest interest rate is the Federal Direct Subsidized Loan. It is a need-based loan offered by the U.S. Department of Education to eligible undergraduate students. The interest rate on the federal direct subsidized loan is 6.53% for the 2023-2024 academic year. The low interest rate is due to the government’s subsidy, which covers the interest and reduces the loan cost compared to other options where interest accrues.

The federal direct subsidized loan fixed interest rates, providing stability and predictability in repayment planning. It has flexible repayment plans, including income-driven options, which help borrowers manage their monthly payments based on their income levels. Federal student loans come with benefits such as eligibility for loan forgiveness programs, deferment, and forbearance options not available with private loans.

The Free Application for Federal Student Aid (FAFSA) form helps determine the student’s financial need and eligibility for different types of federal student aid, including the federal direct subsidized loan. Students must accept the loan, complete entrance counseling, and sign a Master Promissory Note agreeing to the loan terms.

Can a Student Loan Have a 0% Interest Rate?

Yes, a student loan can have a 0% interest rate. Nonprofit organizations, government agencies, and universities offer interest-free student loans that are unique and have specific conditions. The loans are available to members of particular groups, including borrowers who live in certain counties or who practice a specific religion.

A recent bill proposes to drop the student loan interest rate to 0% for borrowers, eliminating interest for current borrowers and capping it on a sliding scale for future borrowers. Understanding how student loans charge interest helps manage debt effectively and save money over the life of the loan.

Is the Interest Rate Fixed during Student Loan Deferment?

Yes, the interest rate is fixed during student loan deferment. Student loan deferment is temporary for monetary difficulty, schooling, or other qualified grounds. The impact of deferment on interest depends on whether the loan is subsidized or unsubsidized. Subsidized federal student loans bear fixed interest rates and do not change during the postponement. The government pays the interest accrued during the deferment, and the loan balance does not increase due to the interest. 

Unsubsidized federal student loans continue to accrue interest during the deferment. The government does not pay the interest, which is added to the loan balance at the end of the student loan deferment period, increasing the amount owed. Lenders of private student loans do not charge the interest accrued during deferment. The interest rate is capitalized at the end of the deferment duration, equivalent to unsubsidized federal loans. Deferment is a short-term solution, and if financial conditions do not improve, an income-driven repayment technique is more suitable.

Do Student Loan Refinance Rates Vary by Lender?

Yes, student loan refinance varies by lender. The variation is due to unique methods of assessing risk and determining interest rates. Credit score, income, job history, and education affect the rates.

Lenders provide lower rates to attract customers, while others have higher rates due to loan structure. Market variables affect variable interest rates, whereas fixed rates remain consistent throughout the loan. Different lenders offer varying student loan refinance rates as of June 2024. Debt.com recommends Credible with a fixed APR of 3.79% to 17.99% with autopay. The variable APR ranges from 5.37% to 17.99% with autopay. SoFi offers rates from 6.24% to 9.99% and Citizens Bank from 7.03% to 12.43%. Compare rates from multiple lenders before deciding on a refinance to ensure the best possible rate.

Can Borrowers Negotiate the Interest Rate on Direct-To-Consumer Student Loans?

Yes, borrowers can negotiate the interest rate on direct-to-consumer student loans. Direct-to-consumer student loans are private loans provided straight to students applying, offering supplemental financing to cover the cost of attending an institution. The loans permit students to handle financial aid unassisted, allowing them to use the funds for education and additional expenses beyond tuition. The funds are deposited into the student’s bank account upon loan approval.

Negotiating the interest rate on student loans is a complex process that depends on the loan type and the borrower’s circumstances. Student loan settlement for direct-to-consumer student loan is a feasible solution for borrowers who have defaulted on loans, which is time-consuming and expensive. Federal and private student loans have different settlement terms, with private loans offering flexible options. 

Refinancing is another way to negotiate lower interest rates. It involves applying to student loan refinance companies, uploading existing loan information to the lender, going through the contract process, and presenting the final offer to the current lender. Comparing interest rates from other lenders and adding a cosigner, especially one with good credit, helps lower the interest rate. Refinancing has risks and consequences, such as a temporary decrease in the debtor’s credit score.

Do Need-Based Student Loans Typically Have Fixed Interest Rates?

Yes, need-based student loans typically have fixed interest rates. Low-income students apply for financial aid through need-based student loans, grants, scholarships, and work-study programs offered by the federal, state, or college governments. The loans are part of a broader financial assistance package, focusing on family income and other financial factors rather than grades or talents.

Need-based student loans, provided by federal programs such as direct subsidized loans, are designed to assist students who demonstrate financial need. The loans have fixed interest rates, giving predictability in repayment amounts. Stability benefits low-income students, allowing finance planning without worrying about fluctuating interest costs. 

The government sets fixed rates annually, ensuring affordability and accessibility for needy borrowers. The total amount of interest paid depends on the loan amount, the loan term, and when interest begins to accrue. Need-based student loans have a grace period, during which interest only accrues after graduation, while others begin accruing interest immediately.

How to Calculate the Interest Rate of the Student Loan?

To calculate the interest rate of a student loan, follow the seven steps below.

1. Identify loan details. Determine if the loan is subsidized or unsubsidized. Identify the loan details, including the principal amount, loan span, payment schedule, interest, and total repayment amount. The repayment amount, which includes the principal amount plus interest, is the total amount paid by the end of the loan term.
2. Calculate the total interest paid. Subtract the principal from the total amount paid. It gives the total interest paid over the life of the loan.
3. Calculate the interest rate. Convert the annual interest rate from a percentage to a decimal by dividing by 100. Divide the annual interest paid by the principal and multiply by 100 to get the interest rate.
4. Determine the time. The loan’s period, expressed in years or months, depending on the loan terms, must be provided in the loan agreement. Calculate each loan separately and total the estimated payments if using the student loan calculator for more than one loan.
5. Total loan cost. The final step is applying the total loan cost formula by adding the principal, interest, and fees. It is represented by C=P+I+F, where C is the total cost, P is the principal, I is the interest, and F is the fees.

How does Student Loan Consolidation Impact Interest Rates on Existing Loans?

Student loan consolidation impacts interest rates on existing loans by resulting in a new fixed interest rate and lowering monthly expenses by lengthening the repayment period. It increases the total interest paid over the life of the loan due to capitalized interest. Student loan consolidation is a U.S. government program that authorizes borrowers to combine multiple federal student loans into a single new loan with a fixed interest rate. The new interest rate is the weighted average of the interest rates on the existing loans. The consolidated loan’s interest rate is slightly higher than the average of the original loans. 
Consolidation lowers monthly payments by extending the repayment period, which increases the total interest the debtor pays over the life of the loan. A longer repayment term means paying less each month. Student loan consolidation is unsuitable for every borrower due to loan types, interest rates, and payment history. The unpaid interest is capitalized, adding to the principal balance and costing more over the loan’s life. Consult a financial consultant or conduct thorough research before making a decision.

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Questions from our readers: Student loan interest rates

Two readers face down their student loans with the help of two of our experts. See what they had to say: