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Why Are Student Loan Interest Rates So High?

August 30, 2018 · 3 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Why Are Student Loan Interest Rates So High?

Because education is a valuable asset, and seeing as college kids are unlikely to have amassed much wealth, you’d think that student loans would have some of the lowest interest rates around. Unfortunately, that’s not the case. Student loan interest rates tend to be higher than other kinds of “good” debt, such as mortgages or car loans.

Current rates for loans disbursed after July 1, 2018 are 5.05% for Direct Subsidized and Unsubsidized loans for undergraduates, 6.6% for Direct Unsubsidized loans for graduate students, and 7.6% for Direct PLUS loans for graduate students or parents of undergrads.

Those rates are creeping up from 2017 and have been higher in the past. Compare that to the July 2018 interest rate of 4.71% for a 30-year fixed mortgage or 4.78% for a 60-month new car loan.

The main reason that student loan interest rates tend to be higher is that they’re unsecured. That means they are not tied to an asset that can serve as collateral. If you don’t pay your mortgage or auto loan, the lender can seize your house or car. That’s a secured loan. But such is not the case for a college degree. In other words, student loan interest rates are higher because the lender’s risk is higher.

How Have Federal Student Loan Interest Rates Changed?

Though interest rates on student loans have fluctuated in the last few decades, they’ve been increasing 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.

During that time, rates were all over the spectrum. After 2006, rates became fixed again for the life of the loan, but differed based on the type of loan (for example, Direct Subsidized versus Direct Unsubsidized). These rates hovered around 6% or 7% until the recession, then fell to 3% or 4% for undergraduate loans and closer to 5% for graduate ones.

Now rates are climbing back up. Comparing the 2017 to 2018 school year, rates for the current year are up 0.60 percentage points. Given other market indicators, there’s no reason to think they won’t continue to rise next year.

Wondering how you might be able to
lower your student loan interest rate?
Check out SoFi student loan refinancing.

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

Unlike federal loans, which have interest rates set by Congress, private lenders can determine their own rates based on the borrower’s creditworthiness and market conditions. Private student loan interest rates can be fixed (meaning the rate might be a bit higher, but it won’t change over the life of the loan) or variable (meaning they typically start out lower but can change over time depending on the market). Since so much depends on the applicant, the rates vary widely between lenders. The Federal Reserve also plays a role when it decides to raise or cut interest rates.

How Can I Get Out Of High Interest Rate Student Loans?

Whether you have federal or private loans, refinancing your student loans is one way to potentially lower your interest rate. This is especially true if you have good credit and a solid income. As we mentioned above, all student loans issued from the federal government after 2006 were offered as a fixed interest rate, whereas private refinancing can be offered as either a fixed or variable interest rate.

Be mindful of the fact that when you refinance with a private lender you can be offered both fixed and variable rate options. Be sure to understand which makes sense for your financial situation before choosing.

Also note that if you are refinancing federal loans with a private lender, you’ll give up some of the federal loan protections such as forbearance, or income-based repayment programs. But if you qualify, refinancing is one of the best ways to lower your interest rate and take control of your student debt.

SoFi is a leader is 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.

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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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