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Understand how student loan interest rates work

How Student Loan Interest Rates Work » Student Loan Debt » How Student Loan Interest Rates Work



student loan interest rates; graduation cap on a pile of money ( student debt )

Student loans usually have special considerations when it comes to interest, whether your loans are federal or private. Understanding the differences with student loan interest can make or break your ability to pay off your loans effectively.

Interest charges may also not apply certain times, like while you’re attending school. Otherwise, by the time you graduate, your loan balance would double in size before you ever start making payments…

Growing student loan interest rates

Loan Type2019-2020 Rate2018-19 Rate2017-18 Rate2016-17 Rate
Direct Subsidized Loans (Undergraduate)4.53%5.05%4.45%3.76%
Direct Unsubsidized Loans (Undergraduate)4.53%5.05%4.45%3.76%
Direct Unsubsidized Loans (Graduate)6.08%6.60%6%5.31%
Direct PLUS Loans (Graduate and Parents)7.08%7.60%7%6.31%


What the rise in interest rates means for borrowers

The increase in the interest rates will increase the monthly payment by about 2.8%, assuming a 10-year repayment term. (For most borrowers that yields an increase of a few dollars a month.)[2]

Loan type10-year Treasury NoteIncrementCapFixed interest rate
Federal Stafford (Undergraduate)2.479%2.05%8.25%4.529%
Federal Stafford (Graduate)2.479%3.60%9.50%6.079%
Federal Parent PLUS2.479%4.60%10.50%7.079%
Federal Grad PLUS2.479%4.60%10.50%7.079%


How is student loan interest assessed?

The first difference with student loan interest comes in how APR applies to your loans. For other types of debt, APR is set based on your credit scores. But that doesn’t work for student loans, because often students don’t have any credit history to qualify for low APR.

Instead, rates on federal student loans are set by the government. Prior to August 2013, rates were set by Congress and a new vote had to happen each year to determine the new rate. But legislative gridlock in 2013 caused student loan APR to jump to 6.8% percent.

The Bipartisan Student Loan Certainty Act of 2013 changed that system. Now interest on student loans is tied to the 10-year Treasury Note index. Each year, in early May, the rates for the next academic year get set based on the current performance of the T-note index.

Even if you take out private student loans, the APR will generally be lower than APR on other loans from the same lender. It’s also easier to qualify for these loans at lower APR, even if you have bad credit or no credit history.

No interest accrual on subsidized federal student loans

If you receive subsidized federal student loans based on financial need, you don’t need to worry about interest charges while you’re in school. Interest doesn’t accrue on subsidized federal student loans while you attend school. It won’t start to accrue until you graduate or drop below half-time enrollment.

Accruing interest also stops during a period of deferment.


Is it possible for the government to pay my interest for me?

Sound like a silly question? It’s not.

In fact, if you seek deferment on the basis of financial hardship or unemployment and you prove your case, then it is possible that the government will agree to make the interest payments on your loans until the deferment is over.

Basically, if you’re unemployed or really underemployed then you can seek a special deferment that delays your payments and makes you eligible for this government assistance. You need to talk to a student loan help specialist to see if that’s an option you can use.

Can consolidation reduce my interest rate?

Maybe – and this is what confuses a lot of people (and where you see a lot of consolidation program providers stretch the truth a little).

When it comes to student loans, consolidation only reduces your interest rates in some cases. If you took out your loans under the old deal and your rates were really high, you may qualify for loan rates when you consolidate under this new deal… but that’s not always the case.

This differs from something like credit card debt consolidation, where one of the main goals is to get lower APR applied to your debts. The goal there is to reduce your interest rates to less than 10 percent or eliminate them completely in some cases.

But student debt consolidation is different. Here, the number one goal is to lower your payments. So if you see an interest rate reduction, that’s awesome. But if you don’t, that doesn’t mean you’re signing up for the wrong program – just that it may not be possible to get a better rate.

Only a specialist can tell you so you know for sure, so you need to talk to someone if you think you’re paying too much or your interest is too high.

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:

Question: I have $130,000 in private student loans with 6.65 percent interest. The minimum monthly payment (interest only) is $715. I am currently paying $750. I also have $35,000 in federal student loans with 4.63 percent interest. The minimum monthly payment is $103. I’m paying $105. This loan will be forgiven after 10 years if I don’t make additional payments. I currently make $2,320 monthly and have $2,500 in savings. How should I attack this debt? – Meisha in North Carolina

Steve Rhode, the Get Out of Debt Guy, responds…

Actually, Meisha, I think you are doing a great job already.

The 10-year repayment plan is the fastest way out of federal student loan debt, and you will wind up paying the least amount of total interest. While there are other options that may lower your payment, you will wind up paying substantially more overall.

Why? Because no one is going to give you something for nothing. If you want a lower payment now, then the holder of that loan will want their money back later. That means extending the length of the overall loan – which means you’ll pay much more in interest since you’re adding years to the loan.

It’s not clear what the length of your private student loan is. Paying more than the minimum each month will go directly toward lowering your balance.

If I had a magic wand, I would help you to find a higher-income job to ease the pressure you may be feeling. You could then stash a bit into your emergency savings account and participate in any employer matching retirement savings plan.

Overall, it seems like you are at the minimum income point to service your student loan debt. The three primary ways to deal with debt are to increase your income, reduce expenses, or a combination of both.

I would bet you’ve already trimmed your expenses. But here is the inside scoop that most “experts” won’t tell you about reducing monthly payments on student loans or any kind of debt…

If you don’t lower the interest rate, then the only way to lower the monthly payment is to extend out the length of the loan. And as I’ve already said, that only makes the loan more expensive in the long run.

Solutions for student loan debt

Before you do anything, I’d recommend you read the report, How to Pay Off Student Loan Debt Fast. It will give you some more in-depth advice on the topics I raised here. You can also compare student loan debt solutions – because if you must extend your loan to get a lower monthly payment, you should try to get the best possible deal you can.

You may also want to explore private student loan settlement, which can be hit or miss and comes with several reservations and caveats. Click the link to see if it’s something worth exploring.

Finally, this situation is Exhibit A for why federal student loans are easier to renegotiate. The federal government has several programs that offer relief. I urge students to be careful about rushing into private student loans.

Crushed by student loan debt and worried you’ll never pay it off? There is help available.

Discover MoreCall To Action Link

Question: My husband has almost $40,000 in student loan debt. Now it’s my turn to go back to school. My school is paid for — no loans necessary — but I’m tempted to get them anyway. If I take out new loans and pay off his loans, we can get an interest rate that is a little less than 1% lower but still keep all the benefits that student loans offer. Is this a good idea?  – Chanel in Utah

Andrew Pentis, personal finance expert and certified student loan counselor at Student Loan Hero, responds…

On the one hand, Chanel, I should applaud you for thinking about your family’s student loan repayment in the right way. Yes, your husband’s interest rate is a critical factor.

On the other, it’s rarely a good idea to take out new loans if you’re able to return to school debt-free.

Sure, borrowing for your education could help you repay what your husband borrowed for his. But let’s review some issues that make this strategy less than sound.

One logistical problem with this strategy

Few reputable lenders, including the Department of Education, will allow you to take out a student loan for your husband’s debt, rather than for your current cost of attendance.

  • Federal student loans: The school will apply your loan directly toward your outstanding balance comprising tuition, fees and room and board.
  • Private student loans: Many banks, credit unions and online companies certify your cost of attendance directly with your school. Once the loan is approved, they send the amount directly to its bursar’s office.

Put another way: The loan would never hit your account, at least not in its entirety, making it more difficult to throw the proceeds at your husband’s debt. (You might receive a leftover amount via a tuition refund check from your school, but that’s probably not what you had in mind.)

Be aware of the risks of repaying your husband’s debt

Even if you find a lender for your purposes (or if you have the cash on hand), it’s important to take a step back and consider the potential harm to your family’s finances.

If you and your husband keep your money separate, what amounts to a $40,000 gift could complicate your relationship. If you’re not confident in how your husband handles his personal finances, for example, resentment could build. Imagine how you’d feel if he started blowing his newfound cash flow on impulsive purchases.

If that scenario makes you queasy even in the slightest, consider that you can help your husband with his student loan repayment without ending it for him. Be there to offer emotional support. You could even guide his research for repayment options, which includes…

Student loan refinancing with a bank (not a spouse) could reduce your interest rate

After pondering your question, Chanel, I only caution you about the means, not the ends.

Essentially, you’re proposing to refinance your husband’s debt: Acting as a lender, you would take out a new loan and use the proceeds (or your savings) to pay off his debt.

Consider this alternative route: Return to school without needlessly borrowing. Separately, encourage your husband to investigate student loan refinancing with an actual bank, credit union or online company. This way, you minimize your risk — and your husband could lower his interest rate.

Just keep in mind that if your husband’s loans were borrowed from the Department of Education, refinancing would lose him access to government-exclusive protections like income-driven repayment or federal loan forgiveness programs.

On the plus side, refinancing could potentially reduce your husband’s interest rate by significantly more than 1.00% — but only if he or a cosigner has good credit. And if your husband’s credit doesn’t make the grade, he could take the time to improve it.

Of course, you could still fly in to save the day if you desire, by becoming his cosigner.



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