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Why Are Student Loan Interest Rates So High?

August 13, 2020 · 7 minute read

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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 always the case. Private and federal student loan interest rates tend to be a bit higher than other kinds of “good” debt, such as mortgages or car loans.

Current rates for federal student loans disbursed after July 1, 2019 are 4.53% for Direct Subsidized and Unsubsidized loans for undergraduates, 6.08% for Direct Unsubsidized loans for graduate or professional students, and 7.08% for Direct PLUS loans for graduate or professional students or parents of undergraduate students.

Current average interest rates for private student loans are as follows: 3.64% to 13.63% for fixed rate loans and 2.72% to 11.88% for variable rate loans.

When compared to other types of loans, these rates might still feel high. In early March 2020, the interest rate was around 3.77% for a 30-year fixed mortgage and around 4.46% for a 60-month new car loan.

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 a bit all over the spectrum. After 2006, rates became fixed again, but differed based on the type of loan (for example, Direct Subsidized versus 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. It remains to be seen what will happen in 2020 amid the coronavirus pandemic.

Compared to 2018, federal student loan interest rates have dipped. Comparing the 2018 to 2019 school year, rates for the current year are down 0.18 percentage points. (2020-2021 rates will be announced at the end of June, 2020.)

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

Federal student loans have their interest rate set by Congress annually, based on the 10-year Treasury note. The interest rate is fixed over the life of the entire loan; meaning, if you get a federal student loan, 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, it will be set by the current rate, not your previous one.

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.

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 pay the loan back 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 sometimes means 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.

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

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 splits 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.

There are four income-driven repayment 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.”
•   Income-Sensitive Repayment Plan — Loan payments will be based on the borrower’s annual income. Under this plan, a borrower’s loan will be repaid in 15 years.

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:

Public Service Loan Forgiveness — If you work for the government or a qualifying non-profit, you might 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.

Teacher Loan Forgiveness — Similar to Public Service 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.
The Public Service Loan Forgiveness program has a strict application process that requires a lengthy commitment from applicants. 2018 data shows that 99% of applicants were denied loan forgiveness that year. 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 into college, you may now have a credit history for lenders to take a look at. 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 for them to lend to, which in turn could also help you secure a more competitive interest rate.

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 all federal student loan protections such as 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.

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SoFi Student Loan Refinance
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 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.

External Websites: 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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s

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