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Why Are Student Loan Interest Rates So High?

By Maureen Shelly · November 01, 2022 · 8 minute read

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Why Are Student Loan Interest Rates So High?

Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.

Student loan interest rates are rising. Over the past two years, rates have jumped by 2.24 percentage points. That’s an increase of 81.5% for undergraduate loans, and 52% for graduate loans. Why are student loan interest rates so high? Some of it comes down to perception: Interest rates are up after a decade of historical lows. But other factors also come into play.

We’ll take a closer look at how student loan interest rates are set, why interest rates are going up, and the different options available for managing high-interest student loans.

How Federal Student Loan Interest Rates Are Determined

The short answer is that Congress sets federal student loan interest rates, while private loan rates depend on the borrower’s (and student loan cosigner’s) credit rating. But that’s not the whole story.

The federal government adjusts federal student loan rates every year based on 10-year Treasury notes, plus a fixed increase. Rates are also capped, so they can’t rise above a certain limit. Here are the formulas:

•  Direct Unsubsidized Loans for Undergraduates:

   10-year Treasury + 2.05%, capped at 8.25%

•  Direct Unsubsidized Loans for Graduates:

   10-year Treasury + 3.60%, capped at 9.50%

•  PLUS Loans to Graduate Students and Parents:

   10-year Treasury + 4.60% Capped 10.50%

Federal student loan interest rates are fixed over the life of the loan. That means, if you get a federal student loan for your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. If you need to take out another federal student loan for your sophomore year, you’ll then get the new rate, not the previous one.

Private student loan lenders set rates according to the London Interbank Offered Rate (LIBOR) or the prime rate. These benchmarks are a reflection of larger economic forces and market prices.

Another factor is that student loans are unsecured. Unsecured loans are not tied to an asset that can serve as collateral. Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can’t seize a degree. So student loan interest rates are typically higher than secured loan rates because the lender’s risk is higher.

Historical Student Loan Interest Rates

Federal student loans interest rates for the 2022-2023 academic year range from 4.99% for undergrad loans to 6.54% for graduate loans. Compare that to 2020-2021, when rates were 2.75% and 4.30%. (Of course, for more than two years, the national payment pause on federal student loans has gifted loan holders a 0% interest rate.) The post-pandemic jump prompted students and parents to wonder why student loan interest rates are so high.

The truth is that rock-bottom rates seen during the pandemic were an anomaly. Historically, student loan interest rates have been closer to current levels than to the previous lows. From the 1960s through 1992, Congress set fixed interest rates for student loans that ranged from 6% to 10%. In the 2000s rates became variable for a while and hovered around 6% or 7%, until becoming fixed again in 2006. Then the recession hit.

The 2009 recession caused interest rates to fall across the board, with student loan interest rates lingering at 3-4% for undergraduate loans and close to 5% for graduate loans. They dipped further during the pandemic. Which brings us to today: A healthier economy means higher interest rates in general, which is good for savings accounts but tough on student loans.

Recommended: Student Loan Refinancing Guide

How To Manage High Interest Rate Student Loans

Whether you’re still in school, just graduated, or considering continuing your post-grad education, you have options that may save you money. But you have to be proactive.

Here are some potential action items depending on where you are in your education:

If You’re Still in College or Grad School

Borrowers with Direct Unsubsidized loans are responsible for the interest that accrues while they’re in school and immediately after. They don’t have to make payments while enrolled, but not making payments means interest will “capitalize” — that is, it will be added to the principal. In other words, you’ll be paying interest on the interest!

To save yourself money on interest, consider making interest-only payments during school until your full repayment period begins after graduation. It will take a small bite out of your budget now, but it can save you money in the long run.

If you have Direct Subsidized loans, no interest will accrue until your grace period ends. No matter what type of student loans you have, you might be interested in our Ca$h Course: A Student’s Guide to Money.

If You Graduated

Student loan forbearance ends December 31, 2022. That means borrowers will have to make monthly payments again come January, and the principal will start to accrue interest. If you’re worried about how federal student loan payments will impact your budget, you may want to change your repayment plan.

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 that means you may pay more in interest over the life of the loan.

Income-driven repayment plans can lower your bill to 10%, 15%, or 20% of your discretionary income, based on your salary and family size. Repayment periods are for 10, 12, or 15 years.

But what if you don’t qualify for income-driven plans, and you don’t want to shell out more in interest? You might consider refinancing. Refinancing your student loans is one way to potentially lower your interest rate or your monthly payments. By using our student loan refinance calculator, you can check the interest rate and repayment terms you qualify for — and find out if refinancing makes sense for your situation.

If You’re Considering Grad School

It can be daunting to consider grad school while staring down undergraduate student loans. The good news is that federal student loan payments are deferred while you’re in grad school at least half time. However, keep in mind that interest continues to accrue during a student loan deferment. If you can afford to make payments, even interest-only payments, you’ll save yourself money down the line.

When it comes time to take out loans for grad school, make sure to consider private student loans as well as federal loans. For undergrads, federal student loan interest rates tend to be lower than private rates. But that’s no so for graduate students: PLUS loans have the highest interest rates and origination fees of any federal student loans.

Also, there are no borrowing limits with private student loans, as there are with federal student loans. So if you’ve exhausted your federal loan limits and you have the credit score to secure a low interest rate, private student loans may be the right choice.

Refinancing Student Loans

As mentioned above, refinancing is one way to deal with high-interest student loan debt if you don’t qualify for federal protections. You can potentially lower your interest rate or your monthly payments. And managing your student loans responsibly is a great way to establish credit and boost your credit score.

Wondering if you should refinance your student loans? You could be a strong candidate 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 have 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 can also help you secure a more competitive interest rate.

Federal Student Loan Forgiveness

Another important factor to weigh is how likely you are to benefit from the current federal student loan forgiveness plan. Under Biden’s plan, federal student loan borrowers earning up to $125,000 (as individuals) or $250,000 for those filing jointly may qualify for up to $10,000 in forgiveness. Pell Grant recipients may qualify for up to $20,000 in forgiveness.

If you qualify for federal student loan forgiveness and still wish to refinance, leave up to $10,000 unrefinanced ($20,000 for Pell Grant recipients) to receive your federal benefit.

Interest Rates for Federal Student Loans vs Private Student Loans

As mentioned above, federal student loans have their interest rate set by Congress annually, based on the 10-year Treasury note. With private student loans, lenders can determine their own rates. 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.

Unlike the single rate set annually for federal student loans, students can shop around for interest rates with private student loan providers. Rates will vary at each lender based on their underwriting criteria, market conditions, and the borrower’s financial profile.

Do Private Student Loans Have Lower Interest Rates Than Federal Loans?

Federal student loans generally have lower interest rates than private student loans.

The exception is federal PLUS loans for grad students, which have the highest interest rates. Private student loans may have lower rates than PLUS loans for qualified applicants.

The Takeaway

Federal student loans generally have lower interest rates than private student loans. The exception is PLUS loans, which have the highest interest rates and may have origination fees. Graduate students and their parents who have excellent credit may find a lower rate among private student loan lenders.

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

If you’re struggling with high interest rates, consider refinancing your student loans with SoFi. SoFi is a leader in the student loan space, offering both private student loans to help pay your way through school, and 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. And there are never any fees, including origination fees.

SoFi was named a 2022 Best Company for Student Loan Refinance by U.S. News & World Report.


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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.
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.

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.


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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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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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