The Complete Guide to Student Loan Interest Rates

Loans, Student Loans
The Education Department's New Student Loan Servicing Plan: What It Means for You

Your interest rate is the price you pay for borrowing money. That might sound straightforward, but student loan interest rates can be complicated. We break them down here.

In this post

Federal student loan interest rates

Private student loan interest rates

Variable vs. fixed interest rates

Refinancing your student loans

Understanding your student loan payments

Capitalization

Federal student loan interest rates

Federal student loans are the loans you apply for by filling out the Free Application for Federal Student Aid, also known as the FAFSA. The federal government issues these loans, but they’re serviced by private companies, including FedLoan Servicing, Great Lakes, Navient and Nelnet.

Congress sets federal student loan interest rates each year based on the financial market, with the exception of federal Perkins loans, which always have a 5% interest rate. Rates vary depending on the loan type, but not based on your credit score or ability to repay the loan. All federal student loans have fixed interest rates, which means your rate won’t change throughout the life of the loan.

The amount of interest you’ll pay on federal loans depends on whether your loans are subsidized or unsubsidized. The government pays the interest on subsidized loans while you’re in school. Interest accrues on unsubsidized loans while you’re in college and is capitalized, or added to your principal — that’s the amount you originally borrowed — at the end of your grace period.

Federal student loan interest rates

For loans disbursed July 1, 2016 to June 30, 2017

Loan Type
Borrower Type
Interest rate
Direct subsidized/unsubsidized
Undergraduate
3.76%
Direct unsubsidized
Graduate5.31%
Direct PLUS
Graduate, parents6.31%
Perkins loans
Undergraduate, graduate5.00%

Private student loan interest rates

Private student loans are loans issued by lenders including Discover, Sallie Mae, Wells Fargo and a growing crop of small online lenders. They have less flexible repayment options than federal loans. NerdWallet recommends taking out a private student loan only after you’ve exhausted your federal student loan options.

Their rates range from around 2.78% to 12.99%, depending on the lender, term length, type of interest rate (variable or fixed), and the borrower or co-signer’s credit. Generally, the better your credit, the lower the interest rate you’ll receive.


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Lenders also consider your debt-to-income ratio, or your expenses — such as housing costs, credit card debt and car loans — relative to your income. Typically, the lower your debt-to-income ratio, the more likely you are to qualify for a low interest rate. Compare offers from several lenders to find the lowest interest rate available to you.

Nerd Tip

You can deduct up to $2,500 in student loan interest payments on your taxes each year. Learn more about how to get the student loan interest deduction.

Variable vs. fixed interest rates

Fixed rates stay the same throughout the life of the loan, while variable interest rates change as the market changes. While some private lenders offer only one type of interest rate, most offer both fixed and variable interest rates. All federal student loans have fixed rates.

Variable rates are typically tied to the prime rate or the London Interbank Offered Rate, known as Libor, which is an international standard for calculating interest rates. Some lenders adjust their variable rates every three months to reflect market conditions; others change them every month.

Variable interest rates typically start out lower than fixed interest rates, but they’re riskier for borrowers because they could rise. If you’re considering a variable-rate loan, ask how often your lender adjusts the rates, how you’ll be notified when it does, and if there’s a cap on the rate. If you choose a variable-rate loan, minimize your risk by paying it off as quickly as possible, says Jeanie Schwarz, NerdWallet’s resident certified financial planner.

Refinancing your student loans

Student loan refinancing or consolidation are the only ways to change a student loan interest rate. When you refinance, you take out a new loan with a lower interest rate to repay your existing student loans.

You can refinance both federal and private student loans, but only through private lenders. If you refinance federal student loans, they’ll become private student loans. You’ll lose certain special features of federal loans, including the ability to sign up for income-driven repayment plans or to defer your loans if you go back to school or lose your job.

If you want to keep those federal protections but make a single monthly payment, you can consolidate your federal student loans through the government. With this option, your new interest rate will be the weighted average of all your federal student loan interest rates.

Understanding your student loan payments

Interest is calculated as a percentage of your loan principal. It accrues daily, so loans with longer terms accrue more interest over time. To save the most money in interest throughout the life of your loan, pay it off as soon as possible.

When you first start making payments on your student loans, a larger percentage of your payment goes toward interest, and a smaller portion goes toward your principal. As you continue making payments, those percentages will flip. By the end of your loan term, most of your interest will be paid off and the majority of your payment will be applied to your principal. This concept is known as an amortization schedule.

If you’re making small monthly payments, as some borrowers do on income-driven repayment plans, it’s possible that your monthly payments could solely be going toward interest without chipping away at your principal. Make more than the minimum payment each month to pay down the interest and principal faster.

If you’re struggling to make payments on your federal student loans, you can temporarily postpone payments through deferment or forbearance. Federal subsidized direct loans and Perkins loans don’t accrue interest during deferment. All other federal loans do accrue interest during deferment, and all federal loans — including subsidized direct loans and Perkins loans — accrue interest during forbearance.

Some private student lenders offer deferment and forbearance, but not all, and their policies are typically less generous than the federal government’s.

Nerd Tip

Interest is unavoidable, but to save the most in interest, make monthly payments that are greater than the minimum, pay off interest that accrues before your grace period ends to avoid capitalization, and pay off your loan as soon as possible.

Capitalization

Capitalization occurs when accrued interest is added to your loan principal. It makes your principal larger than the amount you originally borrowed, and it causes you to pay more in interest over time because new interest is calculated as a percentage of your larger principal.

There are several scenarios in which your interest could be capitalized. If you have unsubsidized federal student loans, the interest that accrued on your loans during college will be added to your balance at the end of your grace period. Interest is also capitalized at the end of deferment or forbearance. If you have subsidized direct loans or Perkins loans, interest is capitalized only at the end of a forbearance period. Capitalization can also happen in other situations, such as when you switch student loan repayment plans, default on a loan or consolidate your federal loans.

Avoid capitalization by paying off accrued interest before your grace, deferment or forbearance period ends.

Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.