Finding the Best Student Loan Interest Rates

By Will Geiger

Will Geiger is the co-founder of Scholarships360 and has a decade of experience in college admissions and financial aid. He is a former Senior Assistant Director of Admissions at Kenyon College where he personally reviewed 10,000 admissions applications and essays. Will also managed the Kenyon College merit scholarship program and served on the financial aid appeals committee. He has also worked as an Associate Director of College Counseling at a high school in New Haven, Connecticut. Will earned his master’s in education from the University of Pennsylvania and received his undergraduate degree in history from Wake Forest University. Full Bio

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Updated: June 14th, 2022

As you search for student loans to fund your college education, interest rates are one of the first things to consider when deciding between your options. Understandably, you’ll want to find the lowest possible student loan interest rates to ensure that you won’t be repaying more than you need to. Even a small increase in interest can lead to a huge additional amount of repayment over the lifetime of your loan.

So, what are the best student loan interest rates out there? In short – you’ll likely never find a better interest rate than those offered to you by the Federal Direct Loans. However, there is a limit on the amount of these loans students can take out per year. So, in this guide, we’ll help guide you through what to look for if Federal Direct Loans do not cover all of your need to borrow.

Learn more: Best student loans for students

How does interest work?

As a student taking out loans for your first time, you may not be entirely clear on how interest rates work. Basically, interest rates are the way that lenders make money by lending money to borrowers. Rather than charging a set fee, they make their fee a yearly percentage of the amount borrowed. If your interest rate is 5%, your amount owed will increase by 5% of your total balance every year. 

Since this charge is a function of the total amount owed, you’ll be charged less the less that you owe. For example, a student with $100,000 in loans and a 5% interest rate will pay an additional $5,000 in the first year for their loans. But, if they pay off half their loan, they will be left with a balance of $50,000. That means that in that year, they will only pay $2,500 in interest. As you pay off more and more of your loan, the amount of interest you’re paying will steadily decrease each year.

Related: Student loan definitions

Fixed vs. Variable Rates

Aside from the actual percentage, one factor to look out for in student loan interest rates is whether they are fixed or variable. Fixed interest rates remain constant over the lifetime of a student loan. On the flipside, variable rates fluctuate with the general interest rates in the market. All federal student loans come with fixed interest rates, whereas some private loans are fixed and others are variable.

Generally, fixed income rates offer a more reliable repayment experience to the borrower. Although they may be put at a disadvantage if interest rates fall, borrowers always have the option to refinance their loans to take advantage of new lower interest rates in the market. Conversely, variable rates tend to offer slightly lower rates at the time of taking out the loan than fixed.

Also see: All about Subsidized vs. Unsubsidized loans

Typical best option: Federal Direct Loans

We’ll start with the cream of the crop: Federal Direct Loans. These include both Subsidized and Unsubsidized Stafford Loans. The 2022-2023 fixed interest rates for these loans are 4.99% for undergraduate students, 6.54% for graduate students, and 7.54% for parents and/or graduate students taking out direct PLUS loans.

Subsidized vs Unsubsidized Federal Direct Loans

As you look at Federal Direct Loans, you may notice that undergraduate loans come in two different editions. These are Subsidized and Unsubsidized. Although their interest rates are the same, Unsubsidized Loans will end up gathering less interest throughout their lifetime. This is because Unsubsidized Loans do not accumulate interest while their borrower is still in school. So, that’s several years without interest gathering, all of which is saved by the borrower.

Also see: Federal Stafford Loans: Everything you need to know

Private student loan interest rates

Although federal student loans come with universal interest rates for all students, private loans are a different story. Each lender has different student loan interest rates, and many even offer individualized interest rates to different applicants based on their credit history. So, as you consider private loans, the key to finding the best interest rates is to cast a wide net and shop around.

You’ll want to compare as many different lenders as possible and get quotes from different possible servicers. One of the best ways to do so is utilizing a student loan marketplace. These services allow you to view a wide array of private loan options side-by-side and choose the best one for you. Oftentimes, you can secure a much lower interest rate as a student if you can find a co-signer.

What to consider apart from interest rates

When it comes to taking out loans, most students’ top priority is to minimize the total amount they have to repay. Understandably, this is one of the biggest factors in most students’ decisions. But it’s worth noting that it shouldn’t be the only deciding factor. Students should also consider things like repayment options, the possibility of forgiveness, and relief during periods of economic hardship. Here is a rundown of some other factors to consider when taking out loans.

Repayment plans

Different types of loans offer different types of repayment plans to accommodate lenders. Federal loans typically have the widest array of options, including income-driven repayment, extended plans, graduated plans, and Revised Pay As You Earn (REPAYE). Borrowers can switch between these plans as their situation dictates, and some can allow borrowers to make very low payments per month during periods of economic hardship. These plans will cause more interest to accumulate, but apart from that, impose no penalties on their borrowers, and cause no damage to their credit score.

Private loans, on the other hand, vary by lender, but typically do not offer such flexible options. During periods of economic hardship, it’s generally much harder to work out a flexible repayment plan with a private lender than with a public one. Borrowers might find themselves impacted by additional penalties and even damage to their credit score if they cannot continue to make standard monthly payments.

However, this is not a be-all-end-all rule. Some private lenders may have more generous repayment policies than others. Make sure to carefully read the terms and conditions of a loan before choosing one.

Forgiveness options

If you are entering a career path that might qualify you for forgiveness, it is probably a good idea to give federal loans a bit more weight than private loans. Unlike private loans, federal loans are eligible for forgiveness programs such as PSLF. If you’re considering entering a public service field, be it teaching, nursing, firefighting, military service, or others, make sure to consider federal loans in order to gain eligibility to have your loans forgiven after ten years of service.

Repayment flexibility

As of June 2022, no federal student loans have required payments or accrued interest for borrowers since the onset of the COVID-19 pandemic. This is the result of multiple repayment pauses through the federal government. In times of national crisis such as these, the government is able to lighten the load on borrowers by instituting interest-free forbearance. However, this only applies to federal loans.

So, when considering which loan to take out, it’s good for students to remember that federal loans are more forgiving during times of crisis. Conversely, most private lenders have continued to require payments and charge interest during this period of economic instability.

Key takeaways

• Federal loans typically have the lowest interest rates of all student loans. However, many students also have to borrow private loans to meet their financial needs
• Fixed interest rates offer a consistent interest rate throughout the life of a loan. Conversely, variable rates fluctuate with the market. However, variable rates tend to be a bit lower at the time the borrower takes them out
• When it comes time to take out private loans, students can find their best possible option by using a student loan marketplace and finding a cosigner
• Interest rates are oftentimes the deciding factor in choosing a loan, but they are not the only one. Students should also consider repayment flexibility and eligibility for forgiveness in their choice