Why Are Student Loan Interest Rates So High?

Student loan interest rates continue to increase. Interest rates for federal undergraduate loans have doubled since 2020—from 2.75% to 5.50%. The cost of borrowing money continues to grow for all types of loans. 

Once you understand why student loan interest rates are so high, you can make better decisions about borrowing money for school. Here’s everything you need to know about student loan interest rates, including tips to get a low rate. 

Why is student loan interest so high? 

Student loan interest rates have increased in recent years. Part of the reason for the increase is that rates were much lower during the COVID-19 pandemic. In an attempt to increase consumer confidence and encourage more spending, the Federal Reserve drastically reduced interest rates in 2020. 

Reviewing the student loan interest rates of the past six years can provide insight into the current rates. The chart below presents a clear picture of federal student loan interest rates for undergraduates spanning from 2018 to 2024:

School year	Interest rate
2023 – 2024	5.50%
2022 – 2023	4.99%
2021 – 2022	3.37%
2020 – 2021	2.75%
2019 – 2020	4.53%
2018 – 2019	5.05%

How federal student loan rates are determined

The U.S. Department of Education disburses federal loans but doesn’t determine the rates. The interest rates are set by federal law. Credit scores don’t affect interest rates for federal student loans. The interest rates are the same for every borrower. 

Each July, Congress determines the annual interest rates for federal student loans. For example, Congress selects the interest rates for the 2024 – 2025 school year in July 2024. Congress reviews the high yield of the last 10-year Treasury note auction yield and other factors to determine the new fixed rate. 

Rates for federal student loans also vary depending on the loan type. Here are the current interest rates for different types of federal student loans. 

Loan type	Borrower	Rate
Direct Subsidized Loans	Undergraduate	5.50%
Direct Unsubsidized Loans	Undergraduate	5.50%
Direct Unsubsidized Loans	Graduate or professional	7.05%
Direct PLUS Loans	Professional students or parents and graduate	8.05%

How private student loan rates are determined

Private lenders don’t have the same rates as federal student loans. Two factors determine the rate for private student loans: the company’s lending model and the borrower’s creditworthiness. 

Every private student loan lender determines a range of rates based on the current Federal Reserve rates and the company’s underwriting model. The borrower’s credit score determines whether they qualify for a lower or higher rate, which is why many students apply with a qualified cosigner to get a lower rate. 

Many student loan lenders have similar interest rate ranges. Still, depending on your creditworthiness, you might qualify for a better rate with a specific lender. Borrowers can also choose between a variable or fixed rate with most private lenders. Variable rates can increase or decrease depending on the market. Fixed rates stay the same throughout the repayment term.

Here are the current student loan interest rates for undergraduates from four top private lenders. 

Lender	Rates (APR)
Sallie Mae	4.50% – 15.49%
SoFi	4.44% – 14.30%
College Ave	4.39% – 16.49%
Ascent	4.29% – 15.76%*

How does the Fed affect student loan interest rates? 

The Fed affects interest rates for federal and private loans. The Federal Reserve is the central bank of the United States. The purpose of the bank is to create a stable monetary system. Determining the federal funds rate is one of the ways the Federal Reserve tries to stabilize the economy. 

The federal funds rate, set at 5.25% – 5.50% in May 2024, is the interest rate banks must pay one another when borrowing money overnight. The rate is for banks lending money to other banks, but it also influences consumer rates, including those for student loans. 

When interest rates increase, borrowing money becomes more expensive for banks and other lenders. As a result, banks raise interest rates for consumers, making it more costly for consumers to borrow money. The same is true if the Federal Reserve lowers interest rates—it typically becomes cheaper for consumers to borrow money. 

The federal funds rate affects student loan rates. Changes to the federal funds rate can affect the interest rate for your current loan if you have a variable rate. It won’t change the terms of your current loans if you have a fixed rate, but it might increase the cost of future student loans. 

How does your interest rate affect your student loan cost? 

Your student loan interest rate influences your monthly payments and the total cost of your loan. You can expect to pay more for student loans if you have a higher interest rate. The same is true if you have a lower rate—the total cost of borrowing money is lower. It’s essential to understand your interest rate and loan terms. 

Take a look at two examples. 

First, imagine you had a $9,000 federal student loan:

Term	Federal loan (example)
Loan amount	$9,000
Interest rate	5.50%
Repayment plan	10 years
Monthly payment	$97.67
Total loan cost	$11,720.84
Total interest paid	$2,720.84

Now, we’ll assume the loan amount is the same, but the borrower took out a private loan at a higher rate:

Term	Private loan (example)
Loan amount	$9,000
Interest rate	8.50%
Repayment plan	10 years
Monthly payment	$111.59
Total loan cost	$13,390.45
Total interest paid	$4,390.45

An interest increase can increase the total cost of your loan—as the example shows, the difference between a 5.50% rate and an 8.50% rate can mean paying almost $1,700 more on your $9,000 loan. 

As you look for student loans, consider the interest rate and select the lowest rates first. You might need different loans and rates to pay for college, but starting with the lowest rate can help you save thousands of dollars. 

How to lower your student loan interest rate

You can take several steps to lower your interest rate. When you apply for loans, choose federal loans first. Then if you need private loans to fill in funding gaps, apply with a qualified cosigner and compare offers from multiple lenders. 

If you already have student loans, consider refinancing to a lower interest rate after graduation. Here’s how to lower your student loan interest rate, regardless of where you are in the process. 

• Choose federal loans first: Federal loans often have lower interest rates, and you don’t need to qualify based on your credit score. So choosing federal loans first often makes the most sense. If you need additional funding, you look into private loans. 
• Apply for private student loans with a cosigner: Private lenders consider applicants’ credit scores when determining interest rates. If you apply with a qualified cosigner, you can often score a lower interest rate. Consider asking a parent, guardian, or other family member to cosign your private loan. 
• Compare offers from multiple lenders: Many private lenders allow you to prequalify for a student loan with a soft credit check that won’t affect your credit report or score. Prequalifying will enable you to view potential loan terms, including interest rates. You can prequalify with several lenders to compare offers and find the lowest rate. 
• Refinance after graduation: If you already have student loans, consider refinancing after graduation. Refinancing allows you to consolidate your loans and secure a lower interest rate. You can even refinance with the same lender if rates have decreased since you got the loan.