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Editor’s note: This article was originally published on Dec. 7, 2016.

Interest rates may be headed up, but most borrowers with educational debt have no idea how rates on private and federal student loans are determined. A surprising number don’t know the difference between fixed- and variable-rate loans, or the interest rate on their own loans.

Those are some of the findings of a new survey of 699 student loan borrowers commissioned by Credible. With the economy picking up steam, the Federal Reserve is widely expected to begin raising a key short-term interest rate when the Federal Open Market Committee concludes a two-day meeting on Dec. 14.

Although the Fed is likely to take a gradual approach to raising short-term rates, long-term interest rates — including 10-year Treasury notes, which serve as an index for government student loans — are already on their way up.

Borrowers who are taking out, repaying, or refinancing student loans can all benefit from an understanding of how movements in short- and long-term rates affect rates on private and federal student loans. Credible’s survey highlights areas where college financial aid counselors and lenders may need to focus their educational efforts.

Issues for students taking out new loans

For borrowers who are still attending school or headed off to college next fall, the recent rise in 10-year Treasury yields means rates on new federal student loans are likely to be going up July 1, 2017.

Although rates on federal student loans are fixed for life, rates for new borrowers are reset annually, based on the outcome of an auction of 10-year Treasury notes held in July. Expectations that the government will have to ramp up borrowing to fund president-elect Donald Trump’s plans to cut taxes and boost spending on infrastructure have sent Treasury yields soaring.

HSBC Bank researcher Steven Major doesn’t think the “Trump effect” will be long lasting, but is forecasting that it will keep yields on 10-year Treasurys at 2.5 percent into early 2017. If rates stay elevated into May, rates on new government loans will be about eight-tenths of a percentage point higher than they are today.

Projected rates for new federal student loans 

Loan type Borrower type 10-year Treasury note (projected, May 2017) Add-on Projected loan rates July 1, 2017
Direct subsidized loans Undergraduate  2.5%  2.05%  4.55%
Direct unsubsidized loans Undergraduate 2.5%  2.05%  4.55%
Direct unsubsidized loans Graduate and professional students 2.5%  3.6%  6.1%
Direct PLUS Loans Parents of dependent undergraduate students and graduate and professional students  2.5%  4.6%  7.1%

Projected rates for new government student loans issued from July 1, 2017 to June 30, 2018, if 10-year Treasury notes are 2.5 percent in May 2017. Source: HSBC Bank projection and U.S. Department of Education rate-setting methodology. (Editor’s note: This article was originally published on Dec. 7, 2016. For updated information on federal student loan rates for loans issued from July 1, 2017 to June 30, 2018, see “Why student loan interest rates are headed up in 2017“)

That would be news to most borrowers surveyed by Credible. Nearly two-thirds of borrowers believe that rates on federal student loans are set by the Department of Education (36 percent of borrowers surveyed) or the Federal Reserve (30 percent of respondents). Only 15 percent knew that rates on government student loans are set by Congress, which has mandated that those rates be tied to yields on 10-year Treasury notes.

Most borrowers (60 percent) are operating under the mistaken assumption that the government offers both fixed-rate and variable-rate student loans. Only one in four borrowers (26 percent) knew that rates on federal student loans issued today are fixed for the life of the loan.

Borrowers seem to have a somewhat better understanding of how private lenders operate, with three in four (74 percent) aware that private student loans are available with fixed, variable and hybrid interest rates.


That knowledge did not extend to how rates on private student loans are determined. Not only did 29 percent of borrowers surveyed select the Treasury Department as having jurisdiction over rates on private student loans, nearly one in five (19 percent) thought rates on private student loans are set by the Consumer Financial Protection Bureau, or mortgage giant Fannie Mae (18 percent of respondents). One in three borrowers (34 percent) correctly identified market forces as the determining factor for rates on private student loans and student loan refinancing.

Student loan refinancing

Most borrowers surveyed by Credible (69 percent) were aware that student loan debt can be refinanced, and most (61 percent) said they’d consider refinancing if interest rates headed up. But most are confused about how they would go about doing that.

Only one in five borrowers (20 percent) correctly identified refinancing with a private lender as the only commonly employed avenue for obtaining an interest rate reduction on student loan debt. One in three borrowers (32 percent) thought they could lower the interest rate on their student loans by taking advantage of a government refinancing program.

Although the Department of Education allows borrowers to consolidate multiple federal student loans into a single loan to simplify monthly payments, federal loan consolidation does not provide borrowers with a lower interest rate. The interest rate on a federal consolidation loan is a weighted average of the borrower’s existing loans, rounded up to the nearest one-eighth of a percent.

Nearly half of borrowers (48 percent), believed that government refinancing programs, refinancing with a private lender, or declaring bankruptcy were all options for obtaining an interest rate reduction. Although student loan debt can be discharged in bankruptcy, in most jurisdictions borrowers must demonstrate undue hardship, meeting a legal definition that critics have characterized as too narrow.

Only one in 10 borrowers (11 percent) said they’d already refinanced student loan debt. Although 14 percent said getting a lower interest rate would pique their interest in refinancing, only 3 percent were interested in just having a lower monthly payment. Nearly half (40 percent) said they’d be interested in refinancing if they could have both a lower interest rate and a lower monthly payment. Among those who knew their rates, more than a third (36 percent) were paying back loans with interest rates 5 percent or higher.

Most borrowers surveyed (60 percent) said they had $30,000 or less in student loan debt, and nearly half (46 percent) had $20,000 or less. But nearly one in four (24 percent) owed $50,000 or more, and close to one in 10 borrowers (8 percent) had more than $100,000 in student loans.

Nearly one in four borrowers surveyed (23 percent) were current students, and one in five (21 percent) completed their degree or left college more than 10 years ago. The rest (56 percent) said they had obtained their degree or left college within the last 10 years.

Nearly a third of borrowers (32 percent) surveyed by Credible said they weren’t interested in refinancing. Borrowers who refinance federal student loans with private lenders lose access to borrower benefits like access to income-driven repayment programs and the potential to qualify for loan forgiveness after 10, 20 or 25 years of payments.
The vast majority of borrowers (87 percent) said they have government student loans, either exclusively (52 percent) or in conjunction with private loans.

Fixed- and variable-rate loans

While rates on federal student loans issued today are fixed for life, most private lenders offer borrowers a choice of fixed-, variable- or hybrid-rate loans.

Although most borrowers (54 percent) said all of their loans carried fixed interest rates, about one in five (22 percent) said they had variable-rate loans, or a mix of fixed- and variable-rate loans. Nearly one in four of those surveyed (24 percent) said they did not know the difference between fixed- and variable-rate loans.

Many borrowers don’t know the benchmark rates that variable-rate student loans are typically indexed to. Most lenders use either the 1-month London Interbank Offered Rate (LIBOR) or the prime rate.

But nearly half of borrowers thought variable-rate student loans are indexed to the federal funds rate (27 percent of respondents) or 10-year Treasury yields (19 percent). Although LIBOR and the prime rate do track the federal funds rate closely, the federal funds rate is not a benchmark for student loans.

Credible’s survey of 699 student loan borrowers was conducted from Oct. 19-27, 2016 by Survey Monkey.

Survey questions



About the author
Matt Carter
Matt Carter

Matt Carter is a Credible expert on student loans. Analysis pieces he’s contributed to have been featured by CNBC, CNN Money, USA Today, The New York Times, The Wall Street Journal and The Washington Post.

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