What is the average federal student loan interest rate

The average public university student borrows $30,030 to attain a bachelor's degree, but they end up paying much more than that thanks to interest.

Interest accrual on top of an already large debt loads means it can take years — sometimes even decades — before borrowers can completely pay off their student loans. Knowing the average interest rates at the time you take out your loan can help you navigate what the coming months and years of student loan payments will look like.

While average interest rates vary widely depending on the type of student loan you have, CNBC Select outlines below the interest rate ranges on private and federal student loans at this time.

• Average interest rates on federal student loans (which about 92% of borrowers have) range from 2.75% to 5.30%.
• Average interest rates on private student loans are generally higher but can range from 3.34% to 12.99% fixed and 1.04% to 11.98% variable.

What to look out for with student loan interest rates

Federal student loans are the most common and offer fixed interest rates. With a fixed rate, the APR you get at the time you take out your loan is the rate you are stuck with for the entire life of the loan (unless you choose to refinance).

Private student loans typically come with higher interest rates than federal loans. Because of the lower rates and the protections that federal loans offer, you should first try maxing out your financing options through the government before you shop around for a private loan.

Private student loans have a fixed or variable APR, and your rate is determined by your specific lender. Generally, lenders look at potential borrowers' credit scores and income to make sure they have a solid financial standing to qualify for a loan.

When to consider refinancing for a lower interest rate

If you are paying a high interest rate on your student loans — anything at or above 10% according to refinancing lender CommonBond — consider refinancing. If you're on the fence, calculate the amount of interest you pay each month. A lower interest rate will likely save you a considerable amount of money over time.

But federal borrowers should be aware of certain caveats to refinancing: With the current federal loan payment and interest pause extended through at least Sept. 30, 2021 as part of the Covid relief, it wouldn't make sense for federal student loan borrowers to refinance with a private lender right now. You can't get a lower interest rate than the current interest freeze.

In accordance with the Fed lowering interest rates across the board, private lenders have also lowered the rates they offer. But note that refinancing from federal to private lenders is irreversible, so once you switch you can't go back. Putting your student loan payment instead into a high-yield savings account like the Varo Savings Account from now through September could bulk up your emergency fund while you decide the best course of action.

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Federal student loans have a fixed interest rate, which means the rate will remain the same for the entire loan term. Private student loans offer either fixed or variable interest rates, which means the rate can either stay the same or change during the loan term.

Borrowers who want stability may prefer a fixed-rate loan, while borrowers who believe they can pay off their loans quickly may save more on interest with a variable-rate loan.

In either case, it’s important to understand the current state of student loan interest rates to ensure you find the most affordable borrowing option.

In this guide:

• Current student loan interest rates for 2022-23
• Current & historic federal student loan interest rates
• How Congress sets federal student loan interest rates
• Current private student loan interest rates
• Current student loan refinancing interest rates
• How to calculate how much interest you will owe
• Difference between variable and fixed rates
• Frequently asked questions about student loan interest rates

Current student loan interest rates for 2022-23

Here are today’s student loan rates for the upcoming school year:

Current & historic federal student loan interest rates

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), interest will not accrue on federal student loans currently in repayment until December 31, 2022, effectively setting the interest rate at 0%. Any payments made during this time will first apply to unpaid interest accrued before March 13, 2020. Then, payments will be applied directly toward the loan’s principal balance.

In the following table, you will find the current and historic interest rates for federal loans. These rates coincide with the academic year that the loans were taken out, i.e. fall 2021 to spring 2022. All of these are fixed rates.

Federal student loans are issued by the Department of Education, and only students who fill out the Free Application for Federal Student Aid (FAFSA) are eligible for these loans. The interest rates on these loans are set once a year and are based on the 10-year Treasury note.

Here’s how interest works for different borrowers:

• Undergraduate students may qualify for Direct Subsidized Loans, which are available for those who have demonstrated financial need. Interest will not accrue on these loans while you are in school and during any deferment periods. Direct Unsubsidized Loans do not have a need-based component, so interest will accrue while you’re in school and during any deferment periods.
• Graduate students may qualify for Direct Unsubsidized Loans or Grad PLUS loans. Direct Unsubsidized Loans have a lower interest rate than Grad PLUS loans. Also, Grad PLUS loans will require a credit check. Interest will accrue on both types of loans while you’re enrolled and during any deferment periods.
• Parents can take out a Parent PLUS loan. To be eligible, you must be the biological or adoptive parent of a dependent undergraduate student and not have an adverse credit history. Unlike other student loans, payments for this loan begin immediately unless you file for deferment. Interest will accrue during all deferment periods.

Current loan origination fees

Federal student loans come with an origination fee, which is deducted from your loan amount prior to disbursement. This means that the official loan amount will be a bit higher than the funds disbursed to your school.

Here’s an example of how the origination fee works: If you took out a $20,000 subsidized loan, the money disbursed to your school would actually be $19,788 after deducting the $212 origination fee.

Here are the current and historical origination fees for federal student loans:

How Congress sets federal student loan interest rates

Congress passes legislation each year to set interest rates for student loans. The rates apply from July 1 of the first year to June 30 of the second year.

In August 2013, the Bipartisan Student Loan Certainty Act was signed into law, which ties federal student loan interest rates to prevailing market rates.

In their current form, the interest rates for all federal student loans are based on the yield of the 10-year Treasury Note auction, plus a fixed increase.

Current private student loan interest rates

Federal and private student loans have different interest rates. Federal loans often have lower rates because they’re set by the federal government and are not dependent on a borrower’s credit score or income. Private lenders will determine your rate based on your credit score and income (or a cosigner’s), the total loan amount, and more.

Rates will also vary depending on if you’re an undergraduate student, graduate student, or a parent. Undergraduate students often have the highest interest rates because they usually have no credit history or income. 

Graduate students usually receive lower rates because they often already have a good credit history. Parents who have good credit scores and high incomes may qualify for low interest rates when they’re taking out loans on behalf of their children.

Below, you will find private student loan interest rates from several lenders in the industry.

Undergraduate student loan rates

To qualify for an undergraduate private student loan, you usually have to be a U.S. citizen or permanent resident. Private lenders will almost always require a cosigner unless the borrower has a good credit score and stable salary.

Private loans can be used to cover the cost of attendance, including tuition, fees, room and board, and living expenses.

Here are undergraduate student loan rates from several private lenders:

To compare your options, check out our picks for the best private student loans.

Graduate student loan rates

Graduate private student loans can be used to pay for a variety of graduate and professional degrees, including medical, law, veterinary, dental, pharmacy school, and more.

Private lenders are less likely to require a cosigner for graduate students, though adding one may help borrowers qualify for a lower interest rate.

Here are graduate student loan rates from several private lenders:

To compare your options, check out our picks for the best graduate student loans.

Parent student loan rates

Parents who want to pay for their child’s college education can take out a parent student loan, which will be used to cover expenses like tuition, fees, room and board, and more. Parents must have a good credit score and current source of income to qualify for a parent student loan.

Many lenders do not offer student loans for parents. Instead, parents are able to cosign for a child, so they remain the primary borrower. Here are the two main lenders that offer parent student loans:

To compare your options, check out our picks for the best parent student loans.

Current student loan refinancing interest rates

Refinancing your student loans is a smart option if you can qualify for a lower interest rate, which will help you pay less interest over the life of the loan. Interest rates for student loan refinancing are often lower than rates for private student loans because borrowers become better loan candidates.

Refinancing is only available through private lenders, not the federal government. Federal borrowers who refinance their loans with a private lender will have to give up benefits like income-driven repayment plans, long forbearance options, and student loan forgiveness programs.

Here are the student loan refinance rates from several private lenders:

To compare your options, check out our picks for the best student loan refinance companies.

How to calculate how much interest you will owe

Every month, the interest amount you owe on your loan is recalculated using a daily interest formula based on your total outstanding loan amount:

Interest amount = Outstanding principal balance x Number of days since last payment x Interest rate factor

The interest rate factor is your annual interest rate divided by the number of days in the year. Your loan servicer is responsible for billing you monthly and explaining how your payments are applied to the principal balance.

You can use our student loan payment calculator to see how much your loan will cost in the long run.

If you apply for forbearance or deferment or sign up for an income-driven repayment plan, your loans will accrue more interest over time, increasing the total interest paid.

>> Read More: How Student Loan Interest Works

Difference between variable and fixed rates

If you are a student or a parent of a student taking out or refinancing a student loan, you should understand the different types of interest rate options that are available.

All federal student loans have fixed rates, which means the rate will not change during the entire loan term.

Private student loans, including refinance loans, may have fixed or variable interest rates. Variable interest rates may change during the loan term, as overall market rates change. This can also result in your monthly payment changing.

Here’s how the interest rate types compare:

Fixed interest rates

The interest rate you pay remains stable over the life of the loan so your monthly payments won’t change until the loan is paid off, forgiven or refinanced.

Pros

• Certainty: You know exactly how much your monthly payment will be each month, so it’s easier to budget. Also, you won’t be impacted if overall rates increase after taking out your loan.

Cons

• Cost: In most cases, the interest rate on a fixed loan will be higher in the early years than the introductory rate on a variable loan. Thus, you may pay more money in the short term with a fixed-rate loan.
• Falling rates: If you take out a fixed-rate loan during a time when rates are high, those rates are locked in unless you refinance the loan when interest rates drop.

Variable interest rates

Variable rates, which are only offered by private lenders, change over time based on a market rate, such as the LIBOR or the federal funds rate.

The new interest rate applies for the reset period, which can be a month, several months or a year. For example, interest on a variable-rate student loan with a term length of 20 years with an annual reset period would be recalculated every year and would apply for the following 12 months.

Rates might go up, down or remain unchanged depending on economic conditions, the lender’s costs, and prevailing interest rates.

Pros

• Cost: The initial interest rate on a variable loan is usually lower. This makes it easier to afford during the first year. In addition, if the base rate remains steady, the overall cost of the student loan over its lifetime might be lower.
• Caps: Many private student loans with variable rates have annual and lifetime caps on rates, which protects borrowers during times of high inflation.

Cons

• Uncertainty: It’s harder to predict your monthly payment amount, which can complicate your budget.
• Cost: You will pay much more with a variable rate loan if the base rate rises substantially. Caps can help, but some loans have outrageously high caps that don’t offer much protection.

>> Read More: Fixed vs. Variable Rate Student Loans

Frequently asked questions about student loan interest rates

What is interest?

Interest is a fee you pay to the lender in exchange for receiving a loan, and lenders use interest proceeds to cover the cost of providing the loan. Many lenders offer similar interest rates, but some lenders may charge higher interest rates because they offer loans to riskier borrowers.

What is a good fixed interest rate for a student loan?

The best fixed interest rate available depends on the borrower’s qualifications and the current rates available. Both federal and private student loan interest rates depend on overall rates in the market.

However, federal interest rates do not depend on the borrower’s credit score or income, while private interest rates do take those factors into account. You should compare both federal and private rates before taking out a loan to find the best fixed rate.

How does the interest rate impact the total cost of a loan?

The interest rate has a huge impact on both the monthly payment and the total interest paid over the life of the loan. For example, a $50,000 loan with a 4% interest rate and a 10-year term will cost $60,748 in total.

However, if that loan has an 8% interest rate and a 10-year term, the total cost will be $72,797. That’s why it’s crucial to choose the lowest interest rate possible.

How do you find a student loan with the lowest rate?

To find a low interest rate on a student loan, you should compare rates among multiple lenders. You never know which company will be able to offer you a better rate based on your financial profile.

In general, choosing the shortest repayment term available will also result in a lower rate. Lenders may also offer better rates if you have a cosigner. And, the lower the loan amount, the lower the interest rate.

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