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Why Are Student Loan Interest Rates So High?

June 25, 2018
Loans, Student Loans

Federal student loan interest rates are increasing for the second year in a row, following two years of rate decreases. Federal undergraduate interest rates are 5.05% for the 2018-19 school year, up from 4.45% in 2017-18 and 3.76% in 2016-17.

Rates have risen as the cost of government borrowing has risen. Congress sets federal student loan interest rates annually based on the high yield of the 10-year Treasury note auctioned in May of each year.

Rates for federal student loans are still lower than they once were, however.

Before Congress began the current rate-setting method in 2013, it set rates arbitrarily, according to a 2017 report by New America, a nonprofit, nonpartisan think tank. Federal rates for undergraduates with direct unsubsidized loans were 6.8% between 2006 and 2013.

Unlike federal loan rates, private student loan interest rates are based on the borrower’s credit, the loan’s term and whether the rate is fixed or variable. If you have a high private student loan interest rate, it’s likely because you or your co-signer had mediocre credit when you borrowed.

» MORE: Current student loan interest rates and how they work

What is a good interest rate for student loans?

Private student loan rates can be higher or lower than federal loan rates, depending on the year and your credit. The best private student loan rates are for borrowers with excellent credit. Current private loan rates range from

5.25% to 14.05%

APR for fixed rates and

3.69% to 12.99%

APR for variable rates.

Put another way, the average current student loan interest rate is 5.8% among all households with student debt, according to the 2017 New America report; anything less than that is a relatively good rate.

How to get the lowest rate

  1. Shop around. Compare the current federal student loan rates with rates from multiple private student loans. If you don’t have excellent credit, apply with a co-signer to qualify for a lower private student loan rate.
  1. Keep fees in mind. While private student loans typically don’t have origination fees, federal loans have a loan fee that’s deducted proportionally from each loan disbursement, making the true cost of federal loans slightly higher than the interest rate reflects.
  1. Weigh federal loan benefits. Even if you can get a lower rate with a private student loan, take out federal loans if you plan to work for the government or a nonprofit, or if you anticipate having trouble making full monthly payments. Federal student loans are eligible for Public Service Loan Forgiveness and income-driven repayment plans. Private loans are not.

» MORE: How to get the lowest interest rate on student loans

Lowering your rate a little can make a big impact

Student loan refinancing is the primary way to lower your student loan interest rates. Shaving even a couple percentage points off your rate can save you thousands.

Say you graduated with $30,000 in student loans at a 6.8% interest rate. Over 10 years you’d pay more than $11,000 in interest alone, according to NerdWallet’s student loan refinance calculator.

If you refinanced to a 5% interest rate, you’d save $27 a month, or about $3,000 throughout the life of your loan — a tenth of what you borrowed in the first place. If you refinanced to a 4% interest rate, you’d save $42 a month and almost $5,000 total.

Before refinancing, compare student loan refinance lenders to see if you could qualify for a lower rate. As with private student loans, you’ll likely get a lower rate by applying with a co-signer.

Refinancing isn’t for everyone, though. You need excellent credit to qualify for the lowest rates, and refinancing federal student loans takes income-driven repayment and Public Service Loan Forgiveness off the table.

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