With most college graduates leaving school with student loan debt, it’s critical to be aware of the interest rates on your student loans when you’re taking them out and when you begin repayment.
Because rates on federal student loans to new borrowers are adjusted annually, a student who takes out federal student loans as a freshman can expect to pay different rates on loans they take out each academic year.
From 2006 to 2018, average student loan interest rates for federal loans were:
- 4.81 percent for undergraduates
- 6.38 percent for graduate students
- 7.44 percent for parents and graduate students taking out PLUS loans
Knowing student loan interest rates for both federal and private student loans can help you make informed decisions when refinancing or applying for private student loans, saving you money and giving you peace of mind.
For example, if you were paying 7 percent interest on a 15-year, $50,000 loan, you’d pay almost $10,000 in additional interest charges compared to a borrower taking out the same loan with a 5 percent interest rate.
The rate on your student loans is a large factor in both your monthly payments and total repayment cost over the life of the loans.
If you think the rates on some of your loans are too high, you can get real rates from top lenders in just 2 minutes from Credible to refinance your student loans. You can compare offers from a variety of vetted lenders, without having to share any sensitive information or authorizing a hard credit pull.
Let’s take a look at student loan interest rates over the last several years.
Federal student loan interest rates
What kind of loan do you have and when were the funds disbursed?
The interest rate on your federal student loan will depend on the type of loan that you have and when the funds were disbursed.
As the chart below demonstrates, rates for federal student loans made to new borrowers were below average in recent years, but are headed back up. Once you take out a federal student loan, the rate is set for life. But rates for new borrowers are adjusted annually, tracking yields on 10-year Treasury notes that reflect the government’s cost of borrowing.
Rates on federal student loans for students headed to school this fall increased for the second year in a row on July 1, 2018. For students headed to school in the fall of 2018, rates on federal student loans will be:
- 5.05 percent for undergraduates
- 6.60 percent for graduate students
- 7.60 percent for parents and graduate students taking out PLUS loans
Although they’re no longer being issued, Perkins Loans have a fixed interest rate of 5 percent regardless of the first disbursement date and were given to those with exceptional financial need.
It’s important to remember that these federal student loans all have upfront fees associated with them. The upfront fee on PLUS loans can increase the annual percentage rate (APR) by more than 1 percentage point!
What are average interest rates on private loans?
Rates on private student loans vary from lender to lender. Federal loans for undergraduates generally have lower interest rates than private loans. However, rates offered by private lenders can be competitive with rates on federal loans for graduate students and parents, including PLUS loans.
While rates on federal student loans are “one-size-fits-all,” private lenders offer lower rates to borrowers with good credit scores. Since most students don’t have the credit history and earnings to qualify for a private student loan on their own, most private student loans are cosigned by a parent or other relative. Having a cosigner can help borrowers get a significantly lower interest rate.
An analysis of thousands of rate requests submitted to the Credible marketplace over the course of a year found that adding a cosigner reduced the lowest prequalified interest rate by 2.36 percentage points.
Keep in mind that the shorter the loan term, the lower the interest rate offered by most lenders. In addition, private lenders typically offer a choice of variable- or fixed-rate loans. Borrowers taking out variable-rate loans can start out with a lower rate, but that rate can fluctuate with the life of the loan (for more on this topic, see “How to Choose Between a Fixed-Rate or Variable-Rate Student Loan“).
Looking back at the year ending May 31, 2018, average interest rates for borrowers using the Credible marketplace to take out private student loans were:
- 6.17 percent for borrowers taking out 5-year variable-rate loans with a cosigner and beginning repayment immediately
- 7.64 percent for borrowers taking out 10-year fixed-rate loans with a cosigner and beginning repayment immediately
Most private lenders also offer fixed-rate loans, at rates that can be competitive with federal PLUS loans for parents and undergraduates. PLUS loans carry a 4.272 percent up-front disbursement fee that’s not charged by private lenders. As NBC Nightly News report, parents with high-interest PLUS loans are often able to refinance them with private lenders at lower rates (see, “Parents can refinance student loans they take out for their kids.”).
What is your average student loan interest rate?
If your loans were provided by the government, the rates on each loan may be found on the chart above. If you have more than one loan with different interest rates, your average interest rate will be somewhere in between.
If you combine your government student loans into a single federal Direct Consolidation Loan, you won’t get a lower interest rate. Your interest rate will be the weighted average of the rates on your existing loans, rounded up to the nearest 1/8th of a percentage point.
Your average interest rate may depend on your field of study, profession or loan provider. Graduate students tend to have loans with higher interest rates.
You can also consolidate private and federal student loans by refinancing them, potentially at a lower interest rate.
How does your rate compare?
Wondering if your interest rate is competitive? If not, this does not mean that you can’t do anything about your current rate. You may qualify to refinance at a lower rate with a private lender. Keep in mind that borrowers refinancing federal loans with a private lender lose government benefits like access to income-driven repayment programs and the potential to qualify for loan forgiveness.
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