Student loan interest rates are rising. In July 2024, interest rates rose to their highest level in 16 years. Rates for undergraduate loans have increased almost 19% over last year and 44% over the past five years. Some loan rates for graduate students have never been as high as they are now.
Why are student loan interest rates so high? Some of it comes down to perception: Interest rates are up after a decade of historical lows. But other factors also come into play.
Read on to learn how student loan interest rates are set, why interest rates are going up, and the different options available for managing high-interest student loans.
Key Points
• Federal student loan interest rates have risen to their highest levels in years, and rates for some loans for graduate students are at record highs.
• Interest rates on federal student loans are set annually by Congress, influenced by the 10-year Treasury note rate plus a fixed increase. Rates are capped at specific limits.
• Private lenders determine interest rates on private student loans, using benchmarks such as the prime rate. Borrowers’ credit scores and credit history also impact private loan rates.
• Students who don’t have a strong credit history may need a cosigner on a private student loan to qualify for more favorable rates.
• Methods to help pay off student loans include paying any accruing interest while in school, using an income-driven repayment plan after graduation, and refinancing student loans.
Understanding Student Loans
There are two main types of student loans — federal and private student loans. Federal loans are offered by the Department of Education (DOE) and they include Direct Subsized and Unsubsidized student loans for undergraduate students, and Direct Unsubsidized loans and Direct PLUS loans for graduate or professional students.
• Direct Subsidized loans are for undergraduates who have financial need. You fill out the Free Application for Student Aid (FAFSA), and your school determines how much you can borrow. The interest on the loan is paid by the DOE while you’re in school and for a six-month grace period after graduation.
• Direct Unsubsidized loans are available for undergrads and graduate students. A borrower does not have to prove financial need for these loans. Again, your school determines the amount you can borrow. However, unlike Direct Subsidized loans, the interest on Direct Unsubsidized loans begins to accrue as soon as the loan is disbursed.
• Direct PLUS loans are for eligible parents (typically called a parent PLUS loan) and grad students. To be approved for one of these loans, a borrower must undergo a credit check and cannot have an adverse credit history. Interest accrues on Direct PLUS loans while the student is in school.
Here’s a look at how the interest rates on these federal loans have increased over the last four years:
| School Year 2021 – 2022 | School Year 2022 – 2023 | School Year 2023 – 2024 | School Year 2024 – 2025 | |
|---|---|---|---|---|
| Direct Subsidized and Unsubsidized Loans for Undergrads | 3.73% | 4.99% | 5.50% | 6.53% |
| Direct Unsubsidized Loans for Graduate or Professional Students | 5.28% | 6.54% | 7.05% | 8.08% |
| Direct PLUS Loans for Graduate or Professional Students or Parents of Undergrads | 6.28% | 7.54% | 8.05% | 9.08% |
There are several different repayment plans for federal student loans, including the standard 10-year plan; graduated repayment in which your monthly payments gradually increase over 10 years; extended payment, which gives you up to 25 years to repay your loans; and income-driven repayment plans that base your monthly payments on your income and family size. Federal loans come with benefits such as federal loan forgiveness.
Private student loans are issued by private lenders, such as banks, credit unions, and online lenders. Their interest rates and loan terms differ from lender to lender. The interest rates on private student loans may be fixed or variable, and the rate you get depends on your credit history. You can use student loan refinancing later on for potentially better interest rates and terms on your private loans, if you’re eligible. (Federal loans can be refinanced as well, but they then become private loans and lose the federal benefits mentioned above.)
By using our student loan refinance calculator, you can check the interest rate and repayment terms you could qualify for — and find out if refinancing makes sense for your situation.
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Factors Contributing to High Interest Rates
Congress sets federal student loan interest rates, while private loan rates depend on the credit rating of the borrower (or their student loan cosigner, if they have one). But that’s not the whole story.
The federal government adjusts federal student loan rates every year based on 10-year Treasury notes, plus a fixed increase. Rates are also capped, so they can’t rise above a certain limit. Here are the formulas:
• Direct Unsubsidized Loans for Undergraduates: 10-year Treasury + 2.05%, capped at 8.25%
• Direct Unsubsidized Loans for Graduates: 10-year Treasury + 3.60%, capped at 9.50%
• PLUS Loans to Graduate Students and Parents: 10-year Treasury + 4.60% Capped 10.50%
The rates for Treasury notes are set based partly on global market conditions and the state of the economy. When market conditions are in flux, the rates for Treasury notes tend to rise.
Federal student loan interest rates are fixed over the life of the loan. That means, if you get a federal student loan for your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. If you need to take out another federal student loan for your sophomore year, however, you’ll then get the new rate, not the previous one.
Private student loan rates vary by lender and fluctuate with market trends. A borrower’s credit history also determines the rate they get for a private student loan.
Another factor is that student loans are unsecured. Unsecured loans are not tied to an asset that can serve as collateral. Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can’t seize a degree. So student loan interest rates may be higher than secured loan rates because the lender’s risk is higher.
Comparison of Federal and Private Student Loan Interest Rates
Why are student loan interest rates so high? As noted above, private student loan rates will fluctuate with market trends and from lender to lender. They also depend on a borrower’s credit score. As of November 2024, some private student loan rates start at about 4% and go up to around 17%.
Private student loan rates for 10-year loans may be higher than the federal interest rate when you are comparing rates concurrently on offer. The rates may be lower for a loan that has a shorter term length than the standard 10 years of federal loans.
What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan. And you can shop around with private lenders for the best interest rates.
Recommended: Student Loan Refinancing Guide
Pros and Cons of Federal and Private Student Loans
Both federal and private student loans have advantages and drawbacks.
Pros of federal student loans include:
• Interest rates for federal loans are fixed over the life of the loan
• The rates for federal loans may be lower than the rates you might get for private student loans
• Depending on the type of federal loan you have, the government may pay your interest while you are in school and during the six-month grace period after graduation
• Federal loans have federal programs and protections such as income-driven repayment plans and federal deferment options
Cons of federal student loans include:
• You can’t shop around for interest rates
• If you take out a new loan in subsequent years, you may get a higher rate than you got with your initial loans
• Borrowing limits may be lower compared to private student loans
Pros of private student loans include:
• You can shop around with different private lenders for lower rates
• Borrowers (or cosigners) with very good or excellent credit can get lower interest rates
• May offer higher borrowing limits than federal loans, spending on what a borrower is eligible for
Cons of private student loans include:
• Borrowers with poor credit will get higher interest rates or may not be able to qualify for a loan
• If the loan has a variable interest rate, it may rise over time
• Private loan student holders don’t have access to the same programs and protections that federal student loan borrowers do
• Deferment and forbearance options (if any) depend on the lender
Interest Rates for Graduate and Professional Degrees
For graduate students and those pursuing advanced professional degrees, interest rates on federal Direct PLUS loans and Direct Unsubsidized Loans for graduate and professional students are substantially higher than the interest rate for Direct Subsidized and Unsubsidized loans for undergrads.
For the 2024-2025 school year, the interest rates are:
Direct PLUS loan: 9.08%
Direct Unsubsidized loans for graduate and professional students: 8.08%
Direct Subsidized and Unsubsidized loans for undergraduate students: 6.53%
The higher rates on loans for graduate and professional students add significantly to the cost of borrowing. Not only that, the interest on these loans begins accruing immediately and while the borrower is in school, which also adds to the overall amount they’ll need to repay.
It’s worth noting that loans for graduate students have much higher borrowing limits than federal loans for undergrads. Graduate students can usually borrow up to $20,500 each year, with a lifetime cap of $138,500. Undergrad borrowers can typically borrow $5,500 for the first year, $6,500 for the second year, and $7,500 for the next two years, up to a total of $31,000.
Credit Score Impact on Private Student Loan Interest Rates
Private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:
• Credit score: Lenders have different requirements when it comes to credit scores for private student loans, but many look for a score of at least 650. As a student, you may not have that high a score, and in that case, you may need a cosigner on the loan in order to be approved.
• Credit history: When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.
• Your cosigner’s finances: Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner, as previously mentioned. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.
To help build your credit as a student, having student loans can help. Managing your student loans responsibly is a good way to help establish credit.
In addition, you might consider getting a credit card with a lower line of credit and use it to cover a few small expenses such as groceries and transportation. Be sure to pay your bill on time each month and in full if you can. Strategies like these can help you build credit over time.
Strategies to Pay Off Student Loans Faster
Whether you’re still in school or you’ve just graduated, you have options that may save you money. But it’s important to be proactive. Here are some potential actions you could take:
If You’re Still in College or Grad School
Borrowers with Direct Unsubsidized loans are responsible for the interest that accrues while they’re in school and immediately after. They don’t have to make payments while enrolled, but not making payments means that, in certain situations, interest may “capitalize” — that is, it will be added to the principal. In other words, a borrower would be paying interest on the interest.
To save yourself money on interest, consider making interest-only payments during school until your full repayment period begins after graduation. It will take a small bite out of your budget now, but it can save you money in the long run.
If you have Direct Subsidized loans, no interest will accrue until your grace period ends.
If You Graduated
Borrowers are automatically placed on the standard repayment plan, unless they select another option. The standard repayment plan spreads repayment over 10 years. Other options, such as the extended plan, extend the repayment term, which can make payments more manageable in the present, but that means you may pay more in interest over the life of the loan.
With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.
Federal Student Loan Forgiveness
You could also explore student loan forgiveness through a state or federal program. Borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan.
In addition, check with your state to find out what loan forgiveness programs they may offer.
Refinancing Student Loans
Refinancing is one way to deal with high-interest student loan debt if you don’t qualify for federal protections. You can potentially lower your interest rate or your monthly payments.
If you’re considering refinancing to save money, you could be a strong candidate if you’ve strengthened your credit since you first took out your loans. Unlike when you were first headed to college, you may now have a credit history for lenders to take into account. If you’ve never missed a payment and have continually built your credit, you might qualify for a lower interest rate.
Having a stable income can also help. Being able to show a consistent salary to a private lender may help make you a less risky investment, which in turn could also help you secure a more competitive interest rate.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
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