Although student loans can help fill in the gaps when other financial aid falls short, they do not come for free. Interest is charged on top of your main debt. The interest rate affects your total debt and your regular payment amount. It's important to shop around for loan rates to be sure the total interest you'll owe will be manageable once you graduate.

How Do They Decide On The Interest Rates For Student Loans?

Interest rates on federal student loans and rates on private student loans are highly correlated. Rates for private student loans fall in tandem with federal loans since both tend to reflect general macroeconomic market tendencies.

Discounted Rates For Federal Student Loans

The interest rates for federal student loans are determined by Congress every May, based on the highest yield from the previous auction of 10-year Treasury notes. These new interest rates will be in effect for all student loan disbursements between July 1 and June 30 of the following academic year.

All federal student loans have a fixed interest rate that will not change over the loan's term. A federal student loan's interest rate is not based on a borrower's credit score or financial background.

The Current Interest Rates on Private Student Loans

Banks, credit unions, and even some internet lenders provide private student loans. Loan interest rates differ from one creditor to the next. Several private student loan companies offer both fixed and variable interest rates.

In the case of a variable interest rate, the rate will change as needed to account for fluctuations in the market. The rates offered by most student loan providers are based on benchmarks like the Libor or Secured Overnight Financing Rate.

How Have Coronaviruses Influenced Student Loan Interest Rates?

In March 2020, when the coronavirus epidemic was at its height, the Federal Reserve Board lowered interest rates, causing student loan rates to drop dramatically. Interest rates on federal student loans were at an all-time low, and borrowers had access to historically low rates on private student loans and on refinancing existing loans.

As a bonus, all federal student loan interest will be erased until the pending lawsuits about student loan forgiveness are settled or June 30, 2023, whichever comes first. However, very strong inflation has gradually compelled the Federal Reserve to increase interest rates in 2022.

The general interest rate rises as a result of these rate hikes. Interest rates on both federal and private student loans have increased for the upcoming 2022–23 academic year. As we get farther into 2023, we may anticipate further rate hikes.

Impact of a President Biden Administration on Student Loans

Since the president has no authority over interest rates for student loans, Vice President Joseph Biden has been looking at other options to help make higher education more accessible. His idea to cancel up to $20,000 in federal student loan debt for millions of students was unveiled in August 2022.

Getting up to $10,000 in federal debt relief is possible if your income is less than $125,000 in 2020 or 2021 or if you're married and filing jointly and make less than $250,000 that year. If you've ever gotten a Pell Grant and are currently in repayment, you might have up to $20,000 forgiven.

With private student loans, there is currently no such thing as a one-time cancellation. Moreover, this offer is valid only for loans closed by June 30, 2022. Due to pending litigation, the initiative has been put on hold as of November 2022.

Variable Interest Rates vs. Fixed Interest Rates

With a fixed interest rate, the total cost of borrowing money and the repayment schedule are known in advance and won't alter throughout the loan's tenure. The interest rate on a government loan will never change.

Monthly payments on loans with variable interest rates might go up or down depending on fluctuations in the market. Regular intervals of one month, three months, or a year are normal for these adjustments. Interest rates for private education loans can be either fixed or variable.

Is A Fixed Or Variable-Rate Student Loan Better?

Student loans with a fixed interest rate may have a higher initial interest rate than loans with a variable rate, but their monthly payments will be stable throughout the loan's duration. The stability of fixed interest rates mitigates the risk of interest rate increases.

Variable-rate loans, on the other hand, usually have lower starting rates, and, depending on market circumstances, you might likely wind up paying more or less over time. But that's a hefty "if." Your comfort level will ultimately determine whether a fixed- or variable-rate loan is better.