Student Loan Interest Rates: How They Work and How to Compare Them

How Federal Student Loan Rates Are Set

Federal student loan interest rates are set by Congress based on a statutory formula. The rate for each loan type is determined by the high yield of the 10-year Treasury note auctioned before June 1, plus a fixed add-on percentage. This rate applies to loans first disbursed between July 1 and June 30 of the following academic year, and the rate is fixed for the life of the loan.

Because the formula is tied to the Treasury auction, federal rates can change from year to year. For example, the rates for undergraduate loans, graduate loans, and PLUS loans each use the same Treasury yield but different add-ons, leading to higher rates for graduate and PLUS loans.

Federal loans also carry an origination fee that is deducted from each disbursement, which can affect the total cost of borrowing. For Direct Subsidized and Unsubsidized Loans, the fee is 1.057%; for Direct PLUS Loans, it is 4.228%.

• Undergraduate Direct Subsidized and Unsubsidized Loans: 10-year Treasury yield plus an add-on for undergraduate loans.
• Graduate or professional Direct Unsubsidized Loans: 10-year Treasury yield plus a larger add-on.
• Direct PLUS Loans: 10-year Treasury yield plus the largest add-on.
• Origination fees: 1.057% for Direct Subsidized and Unsubsidized Loans; 4.228% for Direct PLUS Loans.

Sources: Federal Student Aid (U.S. Department of Education), Bankrate, BestColleges

Current Federal Student Loan Rates by Loan Type

For loans first disbursed between July 1, 2026, and June 30, 2027, the federal government has set fixed interest rates for each loan category. These rates apply to new loans taken out during that period and do not change over the life of the loan.

The table below shows the annual rates and the statutory caps for each loan type. These caps prevent rates from rising indefinitely, providing a ceiling for borrowers.

• Federal rates are fixed for the life of the loan, so your rate will not increase even if market rates rise.
• The federal government pays interest on subsidized loans during in-school, grace, and deferment periods; for unsubsidized loans, you are responsible for interest accruing during those periods.

Sources: Federal Student Aid (U.S. Department of Education), BestColleges, Bankrate

How Private Student Loan Rates Are Set

Private student loans are offered by banks, credit unions, and online lenders. Unlike federal loans, private lenders use risk-based pricing: the interest rate you are offered depends on your creditworthiness and other factors. Rates vary by lender and can be fixed or variable.

The repayment plan and loan term you choose also affect your rate. Shorter terms often have lower rates but higher monthly payments, while longer terms may have higher rates but lower monthly payments.

• Private rates are not set by a single formula; each lender sets its own rates based on market conditions and applicant risk.
• Your credit history, income, existing debts, and loan term can influence the rate you receive.
• A cosigner with strong credit may help you qualify and receive a lower interest rate.
• Some lenders offer rate discounts for automatic payments or other behaviors, which can affect your effective rate.

Sources: BestColleges, Bankrate, Sallie Mae

Fixed and variable interest rates: pros

When you borrow through a private lender, you usually choose between a fixed-rate loan and a variable-rate loan. Federal loans are always fixed-rate. The choice affects your monthly payment stability and your long-term interest costs.

Fixed-rate loans charge the same interest rate for the entire repayment period. Your monthly payment stays predictable (though payment amounts can change if you choose an income-driven plan or consolidate). Fixed rates often start higher than variable rates but protect you from future market increases.

Variable-rate loans have interest rates that can change periodically based on an index such as the Prime rate or SOFR. They typically start lower than fixed rates, but your rate and payment can rise if the index increases. Most variable-rate loans have a ceiling or cap on how high the rate can go, but that cap may be much higher than the initial rate.

• Fixed rates: predictable payments, protection from future rate increases, often higher initial rate.
• Variable rates: lower initial rates, but payments can grow if market rates rise; caps limit maximum rate increases.
• Your choice depends on your risk tolerance and how long you expect to be in repayment.

Sources: Edvisors, Landmark Credit Union

Factors That Affect Your Private Loan Rate

Private lenders assess your creditworthiness to set your interest rate. The stronger your credit profile, the lower the rate you are likely to receive. Understanding these factors can help you prepare your application.

Credit score and history are primary drivers. Lenders also consider your income and existing debt load relative to your income (debt-to-income ratio). A steady employment history can improve your chances. If you have a limited credit history, adding a cosigner with a good credit profile can increase your approval odds and lower your rate.

The repayment plan you choose also affects your rate. For example, loans with shorter terms may offer lower rates but require higher monthly payments. Conversely, longer terms can lower monthly payments but result in more total interest paid over time.

• Credit score: higher scores typically qualify for lower rates.
• Income and employment history: demonstrate ability to repay.
• Cosigner: can strengthen the application and lead to a better rate.
• Loan term: shorter terms often come with lower rates but higher monthly payments.
• Repayment options during school: interest may accrue or be deferred, affecting overall cost.

Sources: BestColleges, Bankrate, Sallie Mae

How to Compare Rates and APRs to Estimate True Cost

When comparing student loan offers, the Annual Percentage Rate (APR) provides a more comprehensive measure than the nominal interest rate alone. APR includes not only the interest rate but also any fees and other costs associated with the loan, expressed as a yearly rate. This allows you to compare the true cost of different loans.

For example, two loans may have the same nominal rate, but one with higher fees will have a higher APR. Always compare the APR when evaluating offers.

Also consider the total cost over the life of the loan, not just the monthly payment. A longer repayment term reduces your monthly payment but increases the total interest paid. To estimate the total cost, multiply your monthly payment by the number of payments, but remember that this does not include taxes or the effect of prepaying.

• Compare APRs rather than nominal rates, as APRs incorporate fees.
• Look at the total interest you will pay over the entire repayment period.
• Consider how long you plan to take to repay the loan.
• Be aware that federal and private loans may have different fees and benefits that affect overall affordability.

Sources: Ascent Funding

Where to Find Current Rates and Official Resources

For authoritative federal rates, check the U.S. Department of Education's Federal Student Aid website. The Department publishes the annual interest rates for federal loans in June each year, effective for loans disbursed the following July 1 through June 30.

Private lenders' rates are set by each institution and can change frequently. Banks, credit unions, and online lenders publish current rates on their websites, but the rate you receive depends on your credit profile. You can also consult financial data aggregators, such as Bankrate, which compile rate ranges from multiple private lenders.

When you apply for a private loan, you receive a Loan Estimate that details the interest rate, APR, fees, and repayment terms. Review this document carefully before accepting the loan.

• Official federal rates: Federal Student Aid (studentaid.gov) and the Department of Education's knowledge center.
• Private rates: each lender's website or rate comparison tools that show ranges.
• Use the Loan Estimate you receive when applying to compare offers side by side.

Sources: Federal Student Aid (U.S. Department of Education), Bankrate

Fixed vs. Variable: Which Should You Choose?

Choosing between fixed and variable rates depends on your financial situation and your outlook for interest rates. This table compares the main categories to help you weigh the trade-offs.

• If you prefer predictable payments and want to lock in your rate, a fixed-rate loan may suit you.
• If you expect rates to stay stable or decline, or you plan to refinance later, a variable-rate loan might offer short-term savings.
• Federal fixed rates are often competitive with private variable rates, especially for graduates with strong credit.

Sources: Edvisors, Landmark Credit Union