Getting a good education is invaluable. Not only can it help you achieve your career goals, which may in turn provide financial security, but it also gives you the opportunity to focus on the subject matter you most want to pursue. But first, you have to fund your education—and with college tuition on the rise, you’re likely to be taking out student loans along the way. More and more students are turning to grants, scholarships, and student loans (both federal and private) to pay for college and grad school.
Student loans, however, come with interest and sometimes other loan fees. Over the course of paying back your student loans, that interest can add up. Depending on the types of student loans you take out and your repayment plan, you could end up paying thousands more in interest than you might have anticipated. That’s money you could be spending on getting your life started after graduation.
And if you have unsubsidized student loans, then the interest that accrues while you’re in school could be added to the principal of your loan. Any interest you can pay off immediately, even before a grace period ends if possible, will help immensely. If that’s not possible, don’t sweat it. Just remember to always make your monthly payments on time, and you’re headed in the right direction.
The first step to getting a good education is educating yourself about your student loans, and the potential interest rates you could be paying.
What is the average student loan interest rate?
How much interest you pay depends on what kind of student loans you take out. For federal student loans, the current interest rates for loans disbursed between July 2017 to July 2018 have been set at 4.45% for undergraduate direct subsidized and unsubsidized student loans, 6% for graduate unsubsidized student loans, and 7% for Direct PLUS loans. The interest rate on Perkins loans is 5%. These are all fixed interest rates, meaning they will not change over the life of the loan.
Private student loan interest rates vary by lender and each have their own criteria for which rates you qualify for. Private lenders also may offer different interest rates if you have a cosigner on your student loan. Private student loans also may offer variable interest rates, meaning they can start lower than a fixed interest rate but then go up over time, based on market changes.
So it could end up costing you more over the life of the loan. According to a report by LendEDU , the average fixed rate on a private student loan is currently just under 10%, while the average interest rate on a variable loan is just under 8%.
How are interest rates determined?
Federal student loan interest rates are set by Congress and generally tied to financial markets—similar to the rate on a 10-year Treasury note. After 2006, federal student loans switched to fixed rates only, fixed interest rates don’t change over the life of the loan. Although federal student loans are serviced by private lenders, the private lender has no say in the interest rate offered.
For private student loans, the lenders set their own rates, though they often take cues from federal rates. Each lender has their own algorithm and credit standards. The rates quoted for student loans vary based on each applicant’s individual situation—though generally the better your financial history, the better the rate. Shopping around to find the best rate and terms could save you money in the long run.
To learn more about private and federal student loans check out our student loan help center.
How can I reduce the interest rates on my student loans?
Since federal student loans switch to only fixed rates in 2006 the interest rates offered to new borrowers over the years has gone both up and down. For instance, borrowers in 2014-2015 were offered a higher interest rate than 2017-2018 borrower, but less than those who borrowed in 2006. That means if you previously signed a loan at a higher interest rate or your credit circumstances have improved, you might be able to refinance at a lower interest rate.
You have two options here: You can refinance or consolidate your loans in hopes of getting a lower interest rate. Refinancing, which is offered by private lenders, is when you get a brand new loan with new terms and a new (hopefully lower) interest rate.
Along with being offered a different interest rate, when you refinance your current student loans with a private lender you may also be able to adjust the length of repayment. Many private lenders offer options to keep your student loan term the same, extend the term length, as well as shorten the term length. All of those options can change the total amount of interest you will pay.
Consolidating with the government doesn’t necessarily lower your interest rate, the new interest rate when you consolidate with the government is a weighted average of your original federal student loans’ rates. It repackages all your federal loans into one and it could lower the average rate on those loans. One important thing to keep in mind is that you can consolidate all your federal loans into one federal loan, but you can only consolidate private student loans and federal student loans together when refinancing with some private lenders.
Consolidating your private and federal loans falls under the umbrella of refinancing, because you’re replacing your old student loans with one, new private loan. Remember that choosing to refinance with a private lender means you will lose the protections of a federal loan (such as Income Based Repayment, Income Contingent Repayment, or PAYE), but if you don’t think you will use those programs, you could potentially lower your interest rate.
SoFi Lending Corp. is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612.
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.
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.