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Student Loan Interest: How Much Interest Should You Expect to Pay on Student Loans?

Student Loan Interest: How Much Interest Should You Expect to Pay on Student Loans?
Nancy Bilyeau

Nancy Bilyeau

Updated March 8, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Interest is a hot topic when it comes to student loans–and understanding it is key.Among all borrowers, 5.8% is the average student loan interest rate, according to recent data from Educationdata.org.Now, how much interest you’re paying on your student loan depends on what type of loan you have, when you took it out, and whether you’ve kept up with your payments.The key difference is between federal student loans–both subsidized and unsubsidized–and private student loans.The government sets the interest on student federal loans. If you are in school now, the government has set the federal student loan interest rate for undergraduates at 3.73% for the 2021-22 school year.  The direct unsubsidized loan rate for graduate or professional students is 5.28%. If you have a private student loan, possibly through a refinance of your federal loan, your private student loan interest rate will vary according to what kind of terms you could get from the lender. Some people, usually the ones holding strong credit scores, might get interest rates as low as 1.86% APR. But people are also getting private loans with interest considerably higher than that.

Student Loan Interest Rates Explained

Interest is paid to a lender as a cost of borrowing money. The amount of money you get as a loan–say, $10,000–is the principal. The interest rate for student loans is calculated as a percentage of that principal.To analyze interest on student loans more closely, the federal loan’s interest rate is determined by the financial index (the 10-year Treasury Note) plus a margin, approved by the U.S. Congress. The interest rate for private loans is also based on a financial index, but it’s one that varies by lender, plus a margin. Then it all depends on the financial health of the person applying for a loan–along with the length of the repayment term.

Average Student Loan Interest Rate

The average student loan interest rate, federal and private, of 5.8% in 2022 is historically quite low. The undergraduate federal interest rate has declined an astonishing 80.36% since rates peaked at 14% in the early 1980s, says Educationdata.org.The interest on student loans has declined substantially just in the last few years. The interest rate among all federal student loans declined 30.17% between the 2019-2020 and 2020-2021 academic years.While the private student loan interest rate on offer can go lower than 2%, the overall average private student loan interest rate generally ranges from 6% to 7%. Among major private lenders, 12.99% is the highest annual percentage rate (APR for student loans) seen.

How Student Loan Interest Works

As explained, the way student loan interest rates are set depends on if the loan is federal versus private. Congress sets interest rates yearly based on the 10-year Treasury note, and the rates are fixed for the life of the federal student loan.Here’s something critical to understand: Unlike other forms of debt, such as credit cards and mortgages, federal student loans are daily interest loans, which means that interest accrues (accumulates) every day. If you choose not to pay the interest that accrues on your loans during certain periods when you are responsible for paying it, the unpaid interest may then be capitalized. This means it is added to the principal amount of your loan. The accruing of interest can pose a financial burden, no question. Student loan forbearance may allow you to temporarily postpone your loan payments. While you’re in forbearance, you may not have to make payments. However, interest might continue to accrue, so your total loan cost may increase quite a bit.Some 43 million Americans are paying down their student loans. The average student debt per person is over $37,000, with half of all student borrowers still owing $20,000 more than 20 years after they entered school. Some people say that skyrocketing interest did its part in worsening their debt over time.With private loans, the details of interest create a different scenario. Interest rates are influenced by the applicant’s credit rating and income history. The higher the risk posed by the person seeking a loan, the higher the interest charged, in general. Some people have a cosigner to obtain the best possible terms.Private loan borrowers can choose either a fixed or variable interest rate. A fixed rate loan has the same interest rate for the entire length of the borrowing period, while variable rate loans may go up or down due to an increase or decrease to the loan's index. Variable interest rates usually start out lower than fixed rates, but that can change.

Factors That May Affect Your Student Loan Interest

With direct subsidized federal loans, students don’t have to pay any interest on their loans while they are enrolled in school. (Payments on subsidized loans aren’t required at all until six months after the students leave school.)For all those Americans still repaying their federal student loan, the interest rates, along with the payments themselves, were temporarily halted in 2020 because of COVID-19 hardship. On April 6, 2022, the Department of Education extended the pause on paying student loans through August 31st, 2022.The emergency relief includes the following measures for eligible loans:
  • a suspension of loan payments
  • a 0% interest rate
  • stopped collections on defaulted loans
Once the federal loan payments resume, so will the interest.

Choosing a Student Loan

When pursuing financial aid, students are required to fill out a Free Application for Federal Student Aid (FAFSA) form. Colleges use your FAFSA data to determine your federal aid eligibility.  Once the school you’ve chosen receives your FAFSA report, you might receive offers of financial aid.Experts advise students to proceed in this order when putting together their aid:
  • Free money first (such as scholarships, grants)
  • Earned money second (work-study)
  • Borrowed money last (student loans)
When deciding between student loans, the main things to look for are how much interest is on student loans and the borrower protections. Using student loans means you can get help with not only tuition but also housing, books, and supplies. If family contributions, savings, and federal student loans can’t cover the cost of everything, private student loans might fill the gap. A cosigner will probably be needed.Refinancing student loans is an option people generally pursue after graduation, when they have an income history.

Refinance Your Student Loan With Lantern

You might be able to obtain a student loan payment with low interest and favorable terms through student loan refinancing with Lantern. Compare terms to discover your options. You will usually need a strong credit score to acquire an appealing offer. If you refinance, you will no longer be eligible for federal debt forgiveness and programs like the pause on payments.
iStock/skynesherThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC112181

About the Author

Nancy Bilyeau

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
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