Low-Interest Student Loans

Whenever you borrow money, it’s important to keep your interest rate as low as possible. The interest rate determines how much you pay over the life of the loan and what the monthly payment is.

When it comes to student loans—both federal and private—the guidelines are no different. In general, federal student loans have lower interest rates than private loans. If you’ve maxed out your federal loans or don’t qualify, you should look for a private loan with a low interest rate.

In this guide:

• Why is it important to find low-interest student loans?
• Low-interest federal student loans
• Private student loans with low rates
• What is considered a low interest rate for a student loan? 
• How can you improve your chances of receiving a low rate?
• What if I received a high interest rate?

Why is it important to find low-interest student loans?

When shopping for student loans, it’s important to look for the lowest interest rate. That’s because interest charges can add a lot to your total repayment cost.

Here’s an example: Let’s say you borrow $50,000 with a 10-year term and an 8% interest rate. You will pay $22,797 in total interest.

However, if you took out a $50,000 loan with a 10-year term and a 5% interest rate, you would pay just $13,640 in total interest. That’s a difference of more than $9,000.

Low-interest federal student loans

In general, federal student loans have lower interest rates than private loans. Federal student loan rates are standardized by the government each year and aren’t based on your credit score or income.

Federal loan amounts may be limited, depending on if you’re an undergraduate or graduate student. Your school’s financial aid department will determine the loan types you’re eligible for after you fill out the Free Application for Federal Student Aid (FAFSA).

Federal loans only have fixed interest rates, which means the rate will stay the same for the life of the loan. Rates vary depending on the type of loan.

Direct Subsidized Loans

With a Direct Subsidized Loan, interest will not accrue while you’re in school and during any deferment periods. Only undergraduate students with demonstrated financial need will qualify for these loans.

To be eligible for a Direct Subsidized Loan, you must fill out the FAFSA, which asks questions about you and your parent’s finances to determine if you qualify for a Direct Subsidized Loan.

Here’s what else you should know about Direct Subsidized Loans:

• Borrowing limit: $3,500 to $5,500 annually, depending on your year in school
• Grace period: 6 months
• Repayment terms: Between 10 and 25 years, depending on the repayment plan you choose

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to both undergraduate and graduate students. You don’t have to demonstrate financial need to be eligible for a Direct Unsubsidized Loan.

For undergraduate students, the interest rate on a Direct Unsubsidized Loan is the same as a Direct Subsidized Loan. However, interest will accrue while you’re enrolled and during deferment periods.

Here’s what else you should know about Direct Unsubsidized Loans:

• Borrowing limit: $5,500 to $12,500 annually for undergraduate students, depending on your year in school; $20,500 annually for graduate and professional students
• Grace period: 6 months
• Repayment terms: Between 10 and 25 years, depending on the repayment plan you choose

Direct PLUS Loans

Direct PLUS loans are available to parents of students as well as graduate or professional students. Unlike Direct Subsidized and Direct Unsubsidized Loans, which are available regardless of your credit score, approval for PLUS loans is based on your credit history.

If you have an adverse event on your credit report, like a bankruptcy or wage garnishment, you may have to add an endorser, which is similar to a cosigner. Borrowers with no credit history will not be penalized and can still qualify for a Direct PLUS loan.

If you’re a graduate or professional student and have maxed out your Direct Unsubsidized Loans, you may qualify for a Direct PLUS loan. Interest rates are always higher for Direct PLUS loans than for Direct Unsubsidized Loans.

Here’s what else you should know about Direct PLUS Loans:

• Borrowing limit: The cost of attendance minus other financial aid
• Grace periods: 6 months
• Repayment terms: Between 10 and 25 years, depending on the repayment plan you choose

Private student loans with low rates

If you’re an undergraduate student, it can be easy to max out your scholarships, grants, and federal loans and still need more money for school. That’s where private student loans come in.

Private lenders offer a range of interest rates, which vary depending on your credit score, income, repayment term, loan amount, whether you have a cosigner, and more. To find the lowest rate, you’ll have to shop around and compare quotes from multiple private lenders.

In general, private student loans have higher interest rates than federal student loans. The actual rate you qualify for will depend on the following factors:

• Credit score and credit history: People with better credit qualify for a lower interest rate.
• Proof of sufficient income to repay the loan: If you have a higher income, you’re considered a less risky borrower.
• Borrowed amount: You may pay a higher interest rate to borrow a larger amount because the lender is taking on a bigger risk.
• Rate type: Variable rate loans typically start lower than fixed-rate loans but can move up or down based on the financial index they’re tied to. Variable-rate loans are riskier because your payments could increase every few months or years.
• Repayment term: Longer repayment plans have higher interest rates and therefore have higher overall loan costs.

The federal government, on the other hand, does not charge different rates based on credit score, income, or the amount you borrow. Federal loans offer one fixed interest rate that is updated annually for new loans.

How to find private low-interest student loans

Here’s how to make sure you’re getting a private loan at the lowest possible interest rate:

• Shop around: Since rates vary from one private lender to another, it’s imperative to compare companies. Look for lenders that provide quotes with a soft credit pull to minimize the number of hard inquiries on your credit report, which can impact your credit score. A good starting point is our list of the best private student loans.
• Consider a cosigner: If you don’t have a steady income or an established credit history, see if you can get a family member or friend to cosign the loan. Cosigning reduces the risk to the lender because your cosigner is legally responsible for paying back the loan. You may get a much better rate with a cosigner—especially if they have excellent credit.
• Compare apples-to-apples: Make sure you understand each loan offer and compare loan terms closely. A variable-rate loan may appear cheaper than a fixed-rate loan, but you’re taking on more risk. Make sure you understand what your payments will be and what you can afford.

Private lenders with low-interest student loans

When comparing interest rates for private lenders, you will see the term “APR.” The APR on a loan equals the interest rate plus any fees the lender charges. You should always compare APRs, not interest rates, because APRs will include the true cost of the loan.

There are many private lenders that offer low-interest loans. Most offer an interest-rate discount if you sign up for automatic payments. Here are some lenders worth considering (the rates listed below are for undergraduate student loans and include the auto-pay discount where applicable):

*APRs shown is for cosigned undergraduate student loan.

What is considered a low interest rate for a student loan?

Overall, market conditions will have a huge impact on what kind of interest rates are available. In general, you should use the federal loan rates as a benchmark.

If you can qualify for a private loan with a lower rate, then that might be a better option. However, you’ll most likely need excellent credit and a cosigner to be eligible for the best rates available from a private lender.

How can you improve your chances of receiving a low rate?

There isn’t anything you can do to lower the rate on your federal student loan, but there are ways to get a lower rate on a private loan.

First, try to improve your credit score by paying off any credit card balances, making all your payments on time, and removing any mistakes from your credit report, which you can find at www.annualcreditreport.com.

Next, make sure you view rates from as many lenders as possible. Getting a wide variety of quotes can help you find the best rate. Once you’ve secured the loan, you should sign up for automatic payments, which will result in a 0.25% interest rate discount with most lenders.

What if I received a high interest rate?

If you’ve qualified for a loan with a high interest rate and have not finalized it, get quotes from other providers before proceeding. Remember, the difference between a high and low rate may be thousands or even tens of thousands of dollars out of your pocket over several years.

If you’ve already taken out the loan, then you can try to refinance it to a lower interest rate after you graduate. Borrowers who have graduated will often qualify for a lower interest rate if they have a full-time job and a good credit history.

You can also add a cosigner to improve the chances of getting a low interest rate when you refinance. As a starting point, check out our picks for the best refinance student loans.