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Student Loans

What Are the Current Interest Rates on Student Loans?

Shuddering at how much you'll need to shell out for a higher education? That's understandable. According to College Board data, the average annual tuition for a four-year public college is $23,890, and private is $32,410—excluding room, board, books and backpacks. To get it done, many people take out student loans. Compared with most other types of credit, these products come with low interest rates, making them pretty attractive.

Just what the interest rate may be for the student loan you get depends on a number of factors. Before you borrow, understand how these rates are determined and learn ways to keep the final cost of the loan down.

Current Interest Rates on Student Loans

Interest rates for federal loans adjust every year. According to Federal Student Aid, an office of the U.S. Department of Education, the rates for the 2018-2019 school year are:

  • 5.05% on direct loans for an undergraduate program.
  • 6.6% on direct loans for graduate and professional programs.
  • 7.6% on direct PLUS loans. Parents usually take these loans to help their children with college expenses.

On the other hand, the interest rates attached to private student loans are set by the financial institutions (banks, credit unions and online lenders), and these rates are in a constant state of flux. The rates for private undergraduate loans may range from a low of 4.20% to 13.49% today, but they probably won't stay this low or high tomorrow.

How Federal Student Loan Interest Rates Work

Although the U.S. Department of Education sets the federal loan interest rates for each school year, the numbers are not random. The rates are based on the U.S. Treasury 10-year notes, and then a couple of percentage points are added on as a margin. So if the note is 3% and 2.05% is added, your student loan's interest rate is 5.05%.

The good news for people who are new to borrowing money (as most young students are) or who have damaged credit histories, is all federal loans except the PLUS loans are exempt from a credit check. The requirement is you must be a part- or full-time college student—there really aren't any hoops you need to go through. Just complete the Free Application for Federal Student Aid (FAFSA) and wait to see what you're qualified to receive.

Additionally, the interest rates on federal loans are always fixed, so your rate will stay the same for the lifespan of the loan—unless you refinance or consolidate the loan (but that would be your choice, not the lender's).

How Private Student Loan Interest Rates Work

If you're interested in private loans, you will have to apply with a lender and meet the eligibility standards. The lender will review your income and check your credit history and credit scores. If you appear to be a poor credit risk, you could be denied, while if you appear to be a good credit risk, you'll likely be accepted. The interest rate you're offered will be on the lower end of the scale if your credit history is positive, and higher if it's not so fabulous.

Private students loans can have fixed or variable interest rates. If it's a loan with a fixed rate, it follows the same rules as the federal loans: The rate won't budge unless you refinance or consolidate.

If your private student loan's interest rate is variable, however, it can fluctuate over the term. Variable interest rates are tied to a short-term index rate (usually the prime rate or London Interbank Offered Rate), and a margin is added to that figure. When those index rates go up or down, so will the interest rate on your loan.

For example, if the prime rate is 5.50%, and the margin is 1.9%, the variable rate will be 7.4%. Not too bad, right? Yes, for now. If an index's rate rises, which can happen monthly, quarterly or annually, so will the rate on your loan. Some variable rate private loans come with a cap, which prevents the rate from going over a certain percentage point.

Loan Terms Affect the Amount of Interest Paid

Even when your student loan's interest rate is fixed and super low, it will still cost you plenty in financing fees if the term is long.

Imagine you borrowed a grand total of $50,000, and the average interest rate is 5.95%. If you paid the loan off within 10 years—the normal repayment term for a federal direct loan—with monthly payments of $554, the total interest you would pay is $16,462! Yet if you were to delete it in five years (and increase the payments to $966), the interest paid would be $7,929. That's still a lot, but not as expensive as the first option.

Therefore, before you agree to only send the bare minimum payments, play around with the numbers and see if you can increase the payments on a regular basis.

How to Reduce Student Loan Interest Rates

Whether your student loan is federal or private, there are a few ways to reduce the rate you have.

  • Consolidate. If you have federal loans with interest rates that are higher than what is currently being offered, you may repackage them with a federal direct consolidation loan to get a lower overall rate. There is no extra fee to do this, but you can't include private loans in the mix.
  • Refinance. If you have an excellent credit history, you may also be able to refinance your existing private student loans with a new loan at a lower rate. There could be an origination fee involved, but it can still work out in your favor if the interest rate is significantly lower.
  • Pay on Time. Want to be rewarded for being responsible? You will be if you pay your federal student loans on time. You could receive an interest rate reduction of 1% after 36 months of perfect payments, and 2% after 48 months.
  • Enroll in Direct Debit. To ensure on-time payments, the vast majority of lenders, from federal student loan servicers to private lenders, will give you a break if you enroll in automatic payment systems. The payment is debited from your checking account on a certain day of the month, then delivered to the lender without you having to do anything but monitor your statements. As an incentive, the lender may reduce the interest rate by .25% or even .50%.

Student Loans and Your Credit Report

Your student loans will appear on your credit report as soon as they're granted, so it's extremely important that you keep them in good standing and monitor your reports and scores to make sure there are no errors. Your student loans will have a positive impact on your credit scores when you manage them well. You can guarantee that will happen by maintaining a perfect payment history—and as the balance recedes, your credit scores will likely rise!

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