Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
More than two out of three of recent college students took out loans to help cover the costs of furthering their education—averaging $29,900 per borrower, including private and federal debts.
When it comes to paying back student loans, both the total amount borrowed (i.e., the principal) and the interest rates (i.e., the percentage charged on top of the principal) can shape how much a borrower ends up shelling out over the life of the loan.
And, just as the cost of attending college in the US has changed with the times, the interest rates charged on educational loans have historically fluctuated.
While the cost of attending college has steadily gone up, the history of student loan interest rates shows both ups and downs. For instance, the 2020-2021 federal loan rates for undergraduates are now 2.75%—compared to 4.29% just five years ago.
A wide variety of educational loans are available to eligible students—including subsidized and unsubsidized federal ones and those handled by private lenders.
Interest rates for different loans change over time. The US government plays a major role in shaping the student loan landscape, setting fixed interest rates each year on federal loans, which can impact the total amount a borrower ends up paying back.
To understand the history of student loan interest rates, it can be helpful to zoom out and take a wide-lens view of the student loan landscape in the US.
The US federal government is the major player in student lending—with $1.51 trillion in debt owed by more than 40 million borrowers. (By comparison, private lenders account for $119 billion in student debts).
Below is an overview of how current rates compare to the recent history of student loan rates:
Understanding US Student Debt
Of the around $14 trillion of outstanding household debt, more than $1.7 trillion comes from student debt—that totals more than what Americans owe for cars or credit card debt, respectively.
Besides mortgages, student loan debt accounts for the largest form of household debt. More than 90% of all outstanding student loans are federal student loans, making the student loan interest rate set by the federal government a significant factor for millions of student borrowers.
Whereas private student loans tend to be set according to a combination of prevailing interest rates and the lender’s projection of the student’s ability to pay, federal student loan rates can be shaped, in part, by something even more confusing than the fine print on a financial statement: politics.
Federal student loans are fixed interest (but the rates are adjusted annually), while private lenders often provide both fixed-rate and variable-interest loans.
Here’s an overview of federal student loan rates and some changes they’ve seen:
What Did the Coronavirus Pandemic Change?
Right now represents an exceptional period in student lending. Typically, federal student loan interest rates are set according to a formula established by the US Congress.
However, presently, the rate is set to zero through Dec. 31, 2022. This means interest will not accrue on Direct Loans, FFEL loans, and Perkins loans issued by the Education Department.
Payments due on federally held student loans have also been paused through Dec. 31, 2022. Both actions are a result of several presidential executive orders that extended benefits first established in the CARES Act—in response to the extraordinary economic situations triggered by the novel Coronavirus pandemic.
Recommended: Navigating Your Student Loans During COVID-19
Federal Student Loans
Federal student loans represent the lion’s share of student lending. But, there’s more than one type of federal student loan. There are a variety of federal educational loans with different student loan interest rates that, historically, have changed with time—from subsidized to unsubsidized, from undergraduate to graduate.
Current federally owned student loans include Direct Loans, Direct PLUS Loans, and Parent Plus Loans.
Recommended: Parent PLUS Loans vs Private Parent Student Loans for College
Direct Loans
“Direct Loans” are responsible for the majority of federal student lending. Issued by the US Department of Education, these loans include both subsidized and unsubsidized student loans.
Subsidized loans are for borrowers who can demonstrate financial need and are exclusively available for undergraduate education, while unsubsidized loans can be used by graduate students. There are also Direct PLUS loans for graduate students and parents of students.
Direct Loans for the 2020-2021 school year have a fixed interest rate of 2.75% for both direct subsidized and direct unsubsidized loans—notably lower than the interest set on federal loans in previous years.
As a point of comparison, Direct Loans for the 2019-2020 academic year were set at 4.53% for subsidized loans and unsubsidized loans. Two years ago (2018-2019), that rate was 5.05%.
Additional Types of Federal Student Loans
The other type of direct loans are PLUS loans and PLUS parent loans. These both carry interest rates determined through a federal government formula. For the 2020-21 school year, the rate on PLUS loans is 5.3%, coming down from 7.08% in 2019-20, and 7.6% two years ago.
For those going to graduate or professional school, the rate for direct loans is now 4.3%. Federal PLUS education loans have a fixed interest rate.
Disused Federal Student Loan Types
The Federal Perkins Loan Program offered fixed-rate loans, at a 5% interest, to qualifying students. This program was aimed at students with exceptional financial needs. Schools stopped disbursing Perkins Loans in 2018—after their authority to do so expired under federal law.
How Are Rates Determined?
Traditionally, federal student loan interest rates have been determined in response to laws passed by the US Congress. According to a piece of legislation from 2013 known as the “Bipartisan Student Loan Certainty Act,” the rate on direct loans is determined by a formula pegged to borrowing cost for government debt.
The first year under this formula produced 3.86% rates on direct loans. During the year before, the 2012-2013 academic year, subsidized loans were 3.4% and unsubsidized loans were 6.8%. (A 2007 bill had lowered the subsidized rate to 3.4%, but it was due to expire in 2012 and go back to 6.8%.) The bill, which set up the formula currently governing federal student loan rates, was meant to address this snapback to a higher rate.
Before the legislation passed, Congress directly set the student loan interest rate, with 3.4% rates on subsidized loans and 6.8% on unsubsidized loans for the 2012-2013 school year. The 2013 bill also introduced caps that limit how high interest rates could go on the new formula.
The cap for direct loans to undergraduates was 8.25%, for graduate student loans it was 9.5%, and for PLUS loans, it was 10.5%. Since 2013, the rates have remained well below the legal caps. You can find previous rates for Direct on the Federal Student Aid website .
Politics and Student Loans
Today’s rates are governed by a formula that differs for different types of loans.
For undergraduate loans, the formula is the interest rate on one type of government debt at a certain time of year plus 2.05%. (The extra interest is added to cover the cost of deferrals, forbearance, and defaults). For graduate student loans it’s that same government debt rate plus 3.6%. And, for PLUS loans, it’s that rate plus 4.6%.
Put another way, the cost students pay to borrow money from the federal government is determined by the cost the government pays to borrow money—plus a fixed buffer of extra interest, which is intended to reduce the risk to the government of students not being able to pay back their loans.
Since late 2018, government borrowing costs have been coming down and since the coronavirus epidemic slammed the brakes on the world economy, borrowing costs have been especially low. So, since the 2018-19 school year, rates have been falling, from just over 5% to under 3%.
Federal student loan interest rates for the 2020-21 school year dropped considerably, in part due to the COVID-19 pandemic and resulting economic downturn. The interest rate on direct subsidized and unsubsidized loans is just 2.75%, down from 4.53% during the 2019-20 school year.
The Takeaway
The interest rates on federal student loans are set by Congress each year and are fixed for the life of the loan. The interest rates are determined based on a formula that the rate on direct loans is determined by a formula tied to borrowing cost for government debt. Federal student loan interest rates for the 2020-21 school year are historically low . The interest rate on direct subsidized and unsubsidized loans is 2.75%.
Millions of students use federal student loans to help them pay for their higher education. These loans come with benefits baked in—including grace periods, income-driven repayment options, forgiveness for public service, and forbearance—that are not guaranteed by private student loans.
But sometimes, federal student aid isn’t enough to cover the cost of tuition and other expenses. For some, a private student loan may help cover the total cost of attending college—including school-certified expenses like, tuition, fees, room and board, and transportation.
Private loans are disbursed by non-government institutions. SoFi, for instance, offers competitive rate in-school loans that come with no fees. And, when a borrower enrolls in autopay, they could get a rate discount.
For those with outstanding student debt, refinancing may be an option to consider. Refinancing student loans may help eligible borrowers pay off their loans faster or lower their monthly payments. (It’s worth noting that refinancing a federal loan with a private lender eliminates federal benefits).
SoFi Student Loan Refinance 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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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-criteria 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.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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