Education loans are a useful source for filling financial gaps when scholarships, grants and other forms of aid fall short. In addition to the principal amount you originally borrowed, these loans carry interest rates which determine the amount of money you are ultimately owed also influencing your monthly payment.
Both federal and private education loans come with interest, the cost which you pay in return for borrowing money. Federal education loan interest rate for undergraduates currently are at 5.50 per cent for the year 2023-24, while graduate students have interest rates of 7.05 per cent or 8.05 per cent. Private education loan interest rate ranges from 4.50 per cent to 16.99 per cent and depends entirely on your credit score.
Here’s what to know about the latest interest rates for federal and private student loans as well as how student loan interest works.
What is the education loan interest rate?
Education loan interest is the amount that you pay in return for borrowing money for completing your education. The moment you begin paying back your loan, a part of each of your monthly earnings will go to your loan principal amount that is how much you have borrowed while another will go towards interest charges.
How much interest you need to pay depends on the exact interest rate you have. Federal education loan rate depends completely on the kind of loan you get, private education loan rate can vary between lenders. Credit also plays a vital role in the case of private rates.
Education Loan Interest Rate
Student loan interest rates were very low for the 2020-2021 academic year as a consequence of the ever-ballooning national student debt, which was a major crisis in early 1995.
- Both for federal and private 6.87% is the average education loan interest rate among all student loans.
- Between 2022-23 and 2023-24, all federal student loan interest rates saw a hike by an average of 8.02%.
- Interest rates for undergraduate loans rose up to 56% slower than interest rates for graduate and professional students.
- The undergraduate federal interest rate has witnessed a decline of 60.7% since rates hiked by 14% in the early 1980s.
Federal Interest Rates
Federal loan constitutes about 94.81% of all student loan debt. Federal loan interest rates are fixed that is the interest rate stays the same as long as there is an outstanding balance on the loan.
- The education loan interest rate among all federal student loans increased by 8.02% from 6.36% between the 2022-2023 and 2023-2024 school years.
- The average federal loan interest rate since 2006 is the same at 5.99%.
- The undergraduate interest rate is 5.50%.
- The current undergraduate interest rate is up 10.2% YoY.
- Since the past 5 years, the average education loan interest rate for undergraduate student loans has remained at 4.30%.
- Federal interest rates are adjusted every year on July 1st.
- The interest rate for a Direct Consolidation Loan is determined by the weighted average of the consolidated loans’ interest rates rounded up to the nearest one-eighth of 1%.
Graduate, Professional, & Parent Rates
- 2023 saw a hike in Direct loans for graduate and professional students by 23.1%.
- PLUS loans for parents as well as for graduate and professional students have increased by 6.76%.
- Graduate and Professional direct loan interest rates are increasing 126% faster than those for undergraduate loans.
- The academic years between 2019-2020 and 2020-2021 witnessed the greatest ever decrease in interest rates for these loans.
- PLUS loan interest rates increased by 33.8% quite slow than those for the undergraduates.
- Until 2010, the now-defunct Federal Family Education Loan Program (FFEL) had a fixed interest rate of 8.50% for parents, graduates, and professional borrowers.
Private Loan Interest Rates
Private lenders have come up with plans similar to federal relief so that they can keep default rates at historic lows; the current private loan default rate is at 2%.
- The overall average private student loan interest rate generally ranges from 4.5% to 16.99% according to the official reports.
- The highest annual percentage rate (APR) is 17.99% among major private lenders.
- The lowest available APR among private lenders is 4.13%.
Refinance Loan Interest Rates
Federal and private student loans can only be refinanced with the help of private lenders.
- After studying it was found that if every eligible borrower refinanced their loans it could lead to a drop in the national average interest rate up to 4.2%.
- Almost 52.8% of borrowers are eligible for refinancing.
Current rates
| Refinance student loans | ||
| Fixed | 5.40% to 9.92% | |
| Variable | 4.68% to 9.47% | |
| Private student loans | ||
| Fixed | 5.99% to 13.78% | |
| Variable | 5.61% to 13.27% | |
| Federal student loans (fixed) | ||
| Undergraduate | 5.50% | |
| Graduate | 7.05% | |
| PLUS (Parent, Grad) | 8.05% | |
Average education loan interest rate
The average education loan interest rate is currently at 5.8% among all households with student debt, as calculated by the Education Data Initiative, an organization responsible for the collection of statistics on the U.S. education system. The data includes both federal and private student loans.
According to the reports, about 90% of all student debt is federal. With an interest rate of 5.8% on $30,000 of total student loans, a borrower would pay about $9,600 in interest over 10 years, the studies affirm.
The average education loan interest rate is higher in some groups, according to the report. Like, the average rate is at 6.3% among households where the borrower didn’t complete a college degree and 6.6% among households earning less than $24,000.
If you have numerous student loans with a diverse range of rates, the weighted normal intrigued rate is the rate you’ll have in case if you solidify the credits through the government. Government solidification won’t lower your normal intrigued rate, but renegotiating with a private bank might.
How to calculate student loan interest
Calculation of your education loan interest rate can help you determine your monthly budget. To calculate the interest rate you pay each month, use the following steps:
- Find your daily interest rate: Divide the annual interest rate by 365.
- Determine your daily interest accrual charge: Multiply the daily interest rate by the remaining principal balance.
- Calculate your monthly payment: Multiply the daily interest accrual by the number of days in your billing cycle.
Some private loans carry a variable rate, so the daily interest rate may fluctuate over the life of the loan. You can also use a student loan calculator to calculate your monthly interest charge.
How can one reduce education loan interest rates?
You may like to consider a few options in case you are looking forward to lowering your education loan interest rate:
- Improve your credit score before applying: private lenders, go through a credit check while you are applying for a loan. A good credit score will take you towards a lower education loan interest rate. Before applying, check your credit reports for errors and avoid applying for other forms of credit.
- Apply with a co-signer: Most borrowers struggle with not having much credit to their name. In this situation, you may want to add a co-signer to your loan. Adding a co-signer with good credit improves your creditworthiness and helps you receive a lower education loan interest rate.
- Choose a variable rate: Choosing a variable rate over a settled one may cause your rate to drop amid financial downturns. Looking at the situation think beyond the doubt that your intrigued rate might rise.
- Refinance old loans: If you take out a loan when interest rates are high, you may be able to refinance into a lower interest rate, strictly true in cases of a better credit score. Just keep in mind that if you refinance a federal student loan, you’ll have a backseat in receiving benefits like coronavirus forbearance and income-driven repayment plans.
How to pay off education loan interest
Student loan interest can add up a significant amount to the overall cost of your loan. To minimize how much you pay in interest, you can:
- Opting for interest-only payments while in school: Many lenders offer the option of making interest-only payments preventing interest rises. On the other hand, some also allow you to make small payments against the principal amount.
- Making biweekly payments: If one can afford it instead of one full payment every month try making half-payments on your loans every two weeks. This will help you pay off your loans faster and shift more of your payment toward the principal rather than interest.
- Putting any extra funds toward your student loans: A tax refund or another one-time sum of money must be sent to your lender and make sure you specify that you want to put it toward your principal amount, that is if you want to. It is a great way to decrease the cost of your loan and the total amount of time you spend paying your loans, which cuts down on the overall education loan interest rate.
Saving money on education loan interest rate
Here are a few strategies that could help you save money on student loan interest:
- Make additional payments: Pay extra towards your principal balance every month which will help you repay your loan faster and reduce on the total interest rate that you have to pay.
- Look into discounts: Lenders may provide you with rate discounts so that you can save money on interest. For instance, you could get a discount by signing up for automatic payments.
- Refinance to a lower rate. If you are someone with good credit, you might qualify for a lower rate if you refinance your student loans. Remember that you can refinance both federal and private education loans. Refinancing federal loans means you will have to give up federal borrower protections.
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Frequently Asked Questions
What is capitalized interest on a student loan?
A capitalized interest rate is an unpaid interest added to your principal amount. This generally increases your total loan amount as well as how much you’ll pay.
What is the average student loan interest rate?
As of the year 2023, the average federal education loan interest rate is approximately 6.87%. On the other hand, the average private education loan interest rate ranges from about 4% to 15%.
Are US student loans interest-free?
In the case of a federal student loan, you will have to repay that loan with interest. Understand the importance of knowing the calculation of interest and the fees associated with your loan. Both of these factors impact the amount you will be required to repay.
Who is eligible for a US student loan?
Eligibility requirements for federal student loans include: The student must file the Free Application for Federal Student Aid (FAFSA) The borrower must be enrolled on at least a half-time basis. The borrower must be a U.S. citizen, permanent resident or eligible non-citizen.
Do US banks give loans to international students?
International students in the U.S. are eligible for student loans, but only private ones. They’re not eligible for federal financial aid from the U.S. Department of Education, which includes subsidized and unsubsidized loans.
