Student loan interest rates: everything you need to know

It’s a common problem: You log in to view your student loans to see how much you owe, and you’re shocked to find that your loan balance is much higher than you originally borrowed. How did it happen? It’s all because of student loan interest.

Whether you’re taking out your first loan or have already started repaying it, understanding how interest accrues on your loans can help you avoid unpleasant surprises as you pay down your debt.

Summary:

Federal interest rates on student loans

When students need to borrow money to pay for college, experts recommend starting with federal student loans since they typically have lower rates and better repayment options than private student loans. The interest rate depends on the type of loan you qualify for and the year you took out the loan.

Current interest rates on federal student loans

Below are the interest rates for federal loans for the 2023-2024 school year.

How federal student loan interest rates work

With federal student loans, the rates are fixed, meaning they stay the same for the duration of your repayment term. The rate-setting process was established by Congress: Rates are based on the high yield of 10-year Treasury bonds at auction, so the rate can change annually for new borrowers.

If you have federal subsidized loans, the government will cover the interest you accrue while you are in college, during the six months after you graduate or leave school, and during any deferment periods. But with unsubsidized and PLUS loans, you are responsible for all interest charges, even while you are in school.

Interest on unsubsidized federal loans is capitalized — or added to the principal of the loan — at the end of the grace period, so it’s common to see your balance grow unless you make payments large enough to cover the accrued interest. Capitalizing interest is expensive because after the capitalized amount is added to the principal, interest continues to be charged on the new larger balance.

Interest rates on private student loans

Private student loans can come from banks, credit unions, and other financial institutions. Lenders can set their own rates, but they usually base them on a measure like the Secured Overnight Refinancing Rate (SOFR), a benchmark that influences the rates at which banks lend to each other.

Lenders will charge the SOFR rate plus a margin rate, such as 1%. As the SOFR rate changes, the lender will also change its rates.

Current rates on private student loans

Private student loan rates vary based on the lender, the borrower’s credit, and the terms of the loan. These loans can have fixed or variable rates; fixed rates never change, while variable rates can vary over time.

Currently, private student loans have the following rate ranges:

*Current rates as of March 7, 2024.

Current rates for student loan refinancing

When you refinance a student loan, you replace your existing student loan (whether it’s a federal loan or a private loan) with a new private loan. Therefore, interest rates on refinance loans tend to follow the same trend line as private student loans in schools. But it’s common for refinance loans to have both a lower interest rate and a lower maximum interest rate.

Currently, refinancing companies offer the following rate ranges:

*Current rates as of March 7, 2024.

How do interest rates on private student loans work?

Interest rates on private loans can vary significantly between lenders, and the rate is affected by your credit history, income, desired loan term, and the program you are enrolled in for the upcoming semester.

With private student loans, payments are generally required while you are in school, although you may be able to pay a reduced amount. Interest begins to accrue immediately after the loan is disbursed.

Private lenders will capitalize the interest at different times, but how the compounding is handled varies by lender.

Keep in mind: Private loans can be a riskier form of debt than federal loans since they usually have higher rates and fewer repayment options. Exhaust other financial aid options before turning to private loans.

How to get a lower interest rate on your student loan

With federal loans, there is no way to qualify for a better rate; Current rates apply to all borrowers regardless of their credit or income.

Private loans work differently. Lenders base rates on your creditworthiness, so you may qualify for a lower rate by following these tips:

• Choose the shortest term possible: Long loan terms, such as 10 to 20 years, can be attractive because they give you a lower payment. But to offset the risk, lenders will charge high interest rates on longer loan terms. To get the lowest rate possible, opt for the shortest term you can reasonably afford.
• Increase your credit: A few months before you need to apply for a loan, focus on improving your credit. Check your credit report and dispute any errors: You can view your report for free at AnnualCreditReport.com, make all recurring payments on time, and minimize new credit inquiries for credit cards or loans.
• Apply with a cosigner: Most college students have limited credit histories and lower incomes, making it difficult to qualify for a loan or secure a competitive rate. If you have a relative or friend with excellent credit, ask them to co-sign a loan with you. Adding a cosigner will increase your likelihood of qualifying for a low interest rate.
• Look round: As mentioned above, interest rates can vary significantly depending on the lender. Shop around and request quotes from different lenders so you can compare options and find the best deal. To help you get started, we’ve identified the best private lenders for student loans.

If you end up with higher rate loans, you may be eligible for student loan refinancing later. Refinancing your debt once you’re employed and have established good credit could allow you to qualify for a new loan with a lower rate, so it can help you save money.

Student loan interest and fees

Student loan interest can be a hassle, but there’s a benefit: It can help you get a bigger tax refund.

Both federal and private student loans are eligible for the student loan interest tax deduction. With this tax break, you can deduct $2,500 in interest or the actual amount of interest paid in a year, whichever is less. This deduction can reduce your taxable income, which can lower your tax bill or help you qualify for a larger tax refund.

To qualify for the full deduction, your modified adjusted gross income (or MAGI) must be less than $75,000 ($155,000 if you are married and filing jointly). You may be eligible for a reduced deduction if your income is between $75,000 and $90,000 ($155,000 and $185,000 if you are married filing jointly). You are not eligible for the deduction if your income exceeds $90,000 ($185,000 for joint filers).

How to claim a student loan interest tax deduction

If you paid $600 or more in interest, your lender will send you a Form 1098-E, Statement of Student Loan Interest, which you can use to claim the deduction. It’s an above-the-line deduction, so you can qualify for the student loan interest deduction even if you don’t itemize your deductions.

Interest on student loans versus other loans

Student loans, especially federal loans for undergraduate students, tend to have lower interest rates than other forms of debt. For example, these are the current rates for common forms of credit:

Sources: Federal Reserve and Freddie Mac. *Current rates as of March 7, 2024.

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