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Why Are Student Loan Interest Rates So High?

By Kayla McCormack · December 05, 2022 · 9 minute read

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Why Are Student Loan Interest Rates So High?

Though college students are unlikely to have amassed much wealth, federal and private student loan interest rates tend to be a bit higher than for other kinds of “good” debt, such as mortgages or car loans.

Current rates for federal student loans disbursed after July 1, 2022 are 4.99% for Direct Subsidized and Unsubsidized loans for undergraduates, 6.54% for Direct Unsubsidized loans for graduate or professional students, and 7.54% for Direct PLUS loans for graduate or professional students or parents of undergraduate students.

As of October 2022, current interest rates for private student loans can range to 13.95% (and possibly higher) for fixed rate loans and to 12.99% (and possibly higher) for variable rate loans.

When compared to other types of loans, these rates might feel high. For example, on September 10, 2022, the interest rate for a 30-year fixed mortgage averaged 6.70%, according to Federal Reserve Economic Data. In general, why do student loan interest rates tend to be somewhat higher than some other common loans? This (mainly) comes down to the differences between secured versus unsecured loans.

Unsecured loans, like student loans, are not tied to an asset that can serve as collateral. Secured loans, in comparison, are backed by something of value. If you don’t pay your mortgage or auto loan, the lender can seize your house or car.

But a lender can’t seize a college degree! In other words, student loan interest rates are typically higher than secured loans’ rates because the lender’s risk is higher.

How Have Federal Student Loan Interest Rates Changed?

Though interest rates on federal student loans have fluctuated over the last few decades, they’ve been fairly steady in recent years. From the 1960s to 1992, Congress set fixed interest rates for student loans that ranged from 6% to 10%.

Over the past couple of decades, federal interest rates varied depending on whether borrowers were in school, in the six-month grace period after leaving school, or in repayment.

Until 2006, rates for federal student loans were all over the spectrum. After 2006, rates became fixed again, but differed based on the type of loan (for example, Direct Subsidized vs. Direct Unsubsidized).

These rates hovered around 6% or 7% until the 2009 recession, then fell to 3% or 4% for undergraduate loans and closer to 5% for graduate ones. In the 2020-2021 school year, amidst the pandemic, rates sank to lows that hadn’t been seen in many years. But compared to that year, federal student loan interest rates for the 2021-2022 academic year rose nearly 1% across the board and increased again for the 2022-2023 academic year.

How Do Private Student Loan Interest Rates Differ From Federal Loan Rates?

The interest rates on federal student loans are set annually by Congress, based on the 10-year Treasury note auction in May. The interest rate is fixed over the life of the entire loan; meaning, if you get a federal student loan for, say, your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. But, if you need to take out an additional federal student loan, say, for your sophomore year, you will get the new rate for it, not the previous rate.

With private student loans, lenders can determine their own rates based on the borrower’s creditworthiness and market conditions. Unlike federal student loans, private student loan interest rates can be either fixed or variable:

•   Fixed, meaning the rate might be a bit higher than a variable rate, but it won’t change over the life of the loan.

•   Variable, meaning they typically start out lower but can change over time depending on the market.
As with any choice, there are upsides and downsides to picking a fixed versus variable interest rate loan. Depending on your financial picture and the offered interest rate on the loan, the choice will likely vary.

Recommended: What’s the Average Student Loan Interest Rate?

Since so much depends on the applicant, the rates vary widely among private lenders. Private student loan rates will fluctuate with market trends, but they’re also dictated by additional factors. When applying for a private student loan, unlike with a federal student loan, private lenders will look at factors including (but not limited to):

•   Credit History – When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.

•   The School You Are Attending – Most four-year schools are eligible for private loans, but some two-year colleges aren’t. Additionally, applicants typically have to be enrolled at least half-time to qualify for private student loans.

•   The Finances of Your Cosigner – Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.

In addition to the above factors, students can shop around for interest rates with private student loan providers, unlike the single rate set annually for federal student loans. Rates will likely vary at each lender based on their underwriting criteria and your financial profile.

While federal student loan rates are annually set, private student loans will vary across a variety of factors from lender to lender.

Managing High Interest Rate Student Loans

Student loan rates can be higher than that of other loans, and if you’re struggling to make your monthly student loan payments because of high interest, it might be time to consider an alternative.

Federal Repayment Plans

If you took out federal student loans, you qualify for various federal repayment plans. Borrowers are automatically placed on the Standard Repayment Plan, unless they select another option. The standard repayment plan spreads repayment over 10 years.

Other options extend the repayment term, which can make payments more manageable in the present, but also means that you may pay more in interest over the life of the loan.

Those struggling to make payments on the Standard Repayment Plan might consider one of the other repayment plans available to federal borrowers. These include the Graduated and Extended repayment plans and other income-driven repayment options.

Income-Driven Repayment Plans

There are five income-based repayment plans to choose from; here is some basic information about each of these federal plans:

•   Revised Pay as You Earn Plan (REPAYE) — In this plan, payments will be 10% of discretionary income each month. The payment amount will be recalculated each year based on income and family size.

•   Pay as You Earn Plan (PAYE) — Similar to REPAYE, your payments will be 10% of monthly discretionary income, but they will never be more than what would be paid on the 10-year Standard Repayment Plan.

•   Income-Based Repayment Plan (IBR) — To qualify for this plan, borrowers must have high debt relative to income. Monthly payments will be 10% to 15% of discretionary income and will be reevaluated annually.

•   Income-Contingent Repayment Plan (ICR) — For ICR, repayment is either 20% of discretionary income, or “the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.

Additional detail can be found on the Federal Student Aid website, which is operated by the Department of Education. To qualify for income-driven repayment, applicants must meet specific requirements. Private student loans aren’t eligible for the repayment plans described above.

Federal Student Loan Forgiveness

In some instances, you may qualify for forgiveness on some or all of your federal student loans. Loan forgiveness is possible under a few specific circumstances, including:

Biden’s Plan for Student Loan Debt Relief

In August 2022, President Biden announced his plan for forgiving up to $20,000 in student loan debt, per qualifying borrower. The announcement outlined that each American who earns $125,000 or less per year ($250,000 for married couples) may be eligible for $10,000 in federal student loan cancellation.

Those who received Pell Grants, may qualify for up to $20,000 in loan forgiveness.

Recommended: Student Debt Relief: Biden Cancels Up to $20K for Qualifying Borrowers

Borrowers will need to apply for this loan forgiveness option. In October 2022, an online form is set to launch. Interested borrowers can apply for this one-time loan forgiveness using that form. Sign into your Federal Student Aid account to sign up to receive an alert when this application is live.

Public Service Loan Forgiveness

Public Service Loan Forgiveness — If you work for the government or a qualifying nonprofit, you may be eligible to receive some form of loan forgiveness.

You have to make 120 qualifying on-time payments on the loan and generally work full time for the organization. Unfortunately, many applicants find the process of applying for public service loan forgiveness challenging, and not all non-profits or government work qualify.

The Public Service Loan Forgiveness program has a strict application process that requires a lengthy commitment from applicants.

Teacher Loan Forgiveness

Teacher Loan Forgiveness — Teachers who work full-time for five years in a qualifying low-income school are eligible for forgiveness on their federal loans. If you qualify for forgiveness, you may be eligible for up to $17,500 on your Direct Subsidized and Unsubsidized Loans.

These student loan forgiveness plans are only for federal student loans, not private student loans. Pursuing federal loan forgiveness might require considerable attention to detail as there are many program requirements that must be met in order to get approved for loan forgiveness.

Refinancing Student Loans

If you’re saddled with high-interest student loan debt and don’t qualify for one of the federal programs mentioned above, it might be time to consider your options around refinancing. Refinancing your student loans is one way to potentially lower your interest rate or your monthly payments.

Among many other factors that vary by lender, you could be a strong candidate for student loan refinancing if:

You’ve improved your credit score since you first took out your loans. Unlike when you were first headed to college, you may now have a credit history for lenders to take into account. If you’ve never missed a payment and continually grown your credit score, you might qualify for a lower interest rate.

You have a stable income. Being able to show consistent income to a private lender may help make you a less risky investment, which in turn could also help you secure a more competitive interest rate.

The Takeaway

As mentioned above, federal student loans generally have lower interest rates than private student loans. And since 2006, federal student loans are offered at fixed interest rates, whereas private refinancing can be offered at either a fixed or variable interest rate.

Please note that if you are refinancing federal loans with a private lender, you’ll give up all federal student loan protections such as student loan forbearance, or benefits like income-driven repayment programs. Refinancing won’t be the right fit for everyone, but for qualified borrowers it could help them secure a more competitive interest rate.

SoFi is a leader in the student loan space, offering both private student loans to help pay your way through school, or refinancing options to help you save on the loans you already have. Check out your interest rate in just a few minutes — with no strings attached.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

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