For most American college students and graduates, student loans are a fact of life. With the cost of a college education at an all-time high and continuing to rise, many students find it necessary to take out loans in order to cover the gap between the cost of tuition and their savings, scholarships, grants and work study.

Although most students have at least some form of student loan debt, few understand the basics of how these loans actually work. This includes one of the most fundamental aspects of student loans: interest rates. Student loan interest rates are the price you pay to borrow money. While this concept may appear to be relatively simple, it can be complex in practice based on the way student loan interest rates are set, how interest is accrued, and how it is calculated on your loans. Learning about student loan interest can help you make better decisions about your debt — and potentially help you pay off your loans sooner.

There are two primary types of student loans: federal and private. Federal student loans are offered by the United States Department of Education while private student loans are offered by any number of private banks and lenders. While federal student loans can have an average student loan interest rate that is lower than private student loans, that is not always the case. Read on to learn more about these different types of loans and how you can take charge of your student loan debt.

Federal Student Loan Interest Rates

You can receive federal student loans by filling out the Free Application for Federal Student Aid, or FASFA. These loans are issued by the government, and have specific protections and benefits, such as the ability to participate in income-based repayment plans or loan forgiveness programs.

Student loan interest rates for federal student loans are set by Congress each year. These student loan rates are based on current market rates as determined by the auction of 10-year Treasury notes prior to June 1 of each year. The only exception to this rule is for Perkins loans; these student loans, which are only available to students with demonstrated financial need, always have a 5 percent interest rate.

All federal student loans have fixed interest rates which means they do not change over the life of the loan. Although Congress changes the student loan rate each year, you keep the fixed rate on the loan you received for any given year. The average student loan interest rate will vary based on the type of loan, but are not dependent on your credit score or your ability to repay them. Generally, direct loans to undergraduate students are offered at the lowest rates, while PLUS loans to parents and graduate students are offered at higher student loan rates. Here is a table with updated as well as historical federal loan interest rates.

Lender/BankFixed APRVariable APR
College Ave5.24% - 11.76%3.22% - 9.89%
Sallie Mae5.74% - 11.85%3.00% - 10.01%
PNC6.26% - 12.99%3.99% - 11.03%
Ascent5.13% - 14.66%3.24% - 12.49%

Source: studentaid.ed.gov

Private Student Loan Interest Rates

Private student loans can be issued by a wide variety of banks and other lenders. The average student loan interest rate for these loans can vary widely based on an applicant’s credit history and ability to repay the loan.

Private student loan interest rates are based on such things as the creditworthiness of an applicant and current market rates. They can range from as low as 3 percent to over 12 percent at this time. Lenders will consider an applicant’s credit score, debt-to-income ratio and other factors to set an interest rate. Generally, applicants with a better credit history will receive a lower interest rate on private student loans. Most college students will be required to have a cosigner in order to qualify for a private student loan. Having a cosigner with a solid credit history can also help a borrower obtain a lower interest rate based on the cosigner’s credit score. However, the cosigner should be aware that he or she will be liable for the full amount of the loans if the applicant is unable to pay.

Private student loan interest rates can either be variable or fixed. A variable rate loan means the interest rate will change over the life of the loan, with the average student loan interest rate typically tied to one of two standards: the prime rate or the London Interbank Offered Rate (Libor). Variable interest rate loans are usually offered at lower rates than fixed rate loans, but can be risky because the student loan rates could rise significantly in the future.

Lender/BankFixed APRVariable APR
College Ave5.24% - 11.76%3.22% - 9.89%
Sallie Mae5.74% - 11.85%3.00% - 10.01%
PNC6.26% - 12.99%3.99% - 11.03%
Ascent5.13% - 14.66%3.24% - 12.49%

Source: The Student Loan Report

Student Loan Refinancing Interest Rates

For borrowers who are unhappy with their loan situation, refinancing is an option for obtaining a lower student loan interest rate; additionally, it could be used to convert a variable interest rate loan into a fixed interest rate loan. Refinancing is where a borrower applies for a new loan, and the proceeds of that new loan are used to pay off the old student loans. Typically, it is used to consolidate multiple loans into one singular loan with a different repayment structure. The new loan could have a lower interest rate, both fixed and variable are offered, which could save the borrower a significant amount of money over time in interest payments.

Refinancing is available for qualified borrowers through private lenders and banks. It can be used for both private and federal student loans. Keep in mind that if a borrower chooses to refinance federal student loans through a private lender, they will lose the protection and benefits of federal student loan programs.

Student loan refinancing interest rates are determined based on an applicant’s creditworthiness and income. The lender will evaluate an applicant’s credit score, current income, debt level, and history of making on-time payments. Based on these factors, the lender will either issue a loan with a new interest rate or deny an application. If approved, the student loan rate could be lower than any of the interest rates that the borrower currently has. If you are approved for an application and the student loan rate is not lower than your current rates, then refinancing typically will not save you any money.

Since private lenders and banks that offer refinancing evaluate multiple factors to decide refinancing rates, they cannot just advertise any singular rate on their refinancing product. Instead, they provide ranges of interest rates with highs and lows, detailing what potential student loan interest rates are available to applicants. Those with an ideal application, meaning excellent credit score and solid income, are more likely to qualify for a rate on the low end of the spectrum.

Lender/BankFixed APRVariable APR
SoFi3.375% - 6.740%2.565% - 6.490%
College Ave4.65% - 7.50%3.88% - 6.88%
LendKey3.25% - 7.26%2.43% - 5.97%
Earnest3.75% - 6.64%2.76% - 6.24%

Source: The Student Loan Report

How to Refinance Your Current Interest Rate

Refinancing your current interest rate is a relatively simple process. Start by determining what kind of loans you have (private or federal), which you can do by obtaining a copy of your credit report or by logging onto the Federal Student Aid portal to obtain a copy of your federal student loan documents. Next, decide if you want to refinance your federal student loans along with your private student loans, keeping in mind that if you do so, you will lose the advantages of federal student loans.

Once you have decided to refinance your student loans, you should compare the average student loan interest rates offered by different lenders. You can then apply online directly through the lender. As a general rule, your chances of approval are lower unless your credit score is at least 660 and you have a history of making regular, on-time payments on your student loans.

Once you are approved for a refinanced student loan, you’ll learn about your new interest rate, and you’ll receive the proceeds of your new refinance loan, paying off your old loans.

Benefits to Refinancing Your Student Loans

Refinancing your student loans can help you obtain a much lower student loan interest rate than you currently have. Over the life of your loan, even a slightly lower student loan interest rate can save you thousands of dollars. It can also convert variable rate loan to a fixed rate. This offers more certainty in repayment and expected interest costs. Another important benefit is the

What is the Difference between Variable, Fixed, and Hybrid Interest rates?

There are three primary types of interest rates available on student loans: fixed, variable, and hybrid. The type of interest rate you choose will depend on a number of factors, including the amount you borrow and your ability to withstand financial risk.

Fixed Rate Student Loans

Fixed rate student loans offer the same student loan interest rates throughout the entire loan term. If you signed a promissory note for a student loan with an interest rate at 4 percent in 2015, then you will pay 4 percent interest on that same loan in 2025 or 2030. All federal student loans are fixed rate loans, and many private student loans and refinancing loans offer the option of fixed rate loans as well. Fixed rate loans offer the advantage of being predictable since you will know exactly what your payment is for the entire life of the loan. The trade-off for this stability is that fixed interest rate loans tend to have slightly higher rates than variable rate loans.

Variable Rate Student Loans

Variable rate loans have student loan interest rates that can change over the life of the loan. The interest rates of these loans are tied to a market benchmark such as the Libor or prime rate. The average student loan interest rate for variable rate student loans tends to be lower than fixed rate loans, at least initially. If interest rates rise over time due to market fluctuations, then these rates have the potential to be substantially higher than the rates for fixed interest rates loans. Variable rate loans may be a great option if you intend to pay off your loans quickly and do not mind uncertainty.

Hybrid Rate Student Loans

A hybrid student loan is a loan that starts off at a fixed interest rate and converts to a variable interest rate loan after a set period of time. These loans may also be referred as a fixed-to-float or adjustable rate loan. The benefit of these loans is that you will typically get a lower fixed interest rate at the beginning of the loan term. However, there is the risk that the variable interest rate will be much higher if the average student loan interest rate has risen significantly after the set period of time is over.

How Do You Pick?

Choosing what type of student loan works for you will depend on your ability to absorb financial risk and the amount of student loan debt you will have. A fixed rate loan offers stability and certainty, while variable and hybrid rate loans offer potential cost savings for those who are willing to take the risk of the interest rates rising. If you are able to take on a short loan term or make large loan payments early in the life of the loan, then a variable or hybrid interest rate loan may work for you.

How Do Student Loan Interest Rates Change with the Market?

When the economy is volatile, many student loan borrowers worry that their student loans will be impacted as well. The question of whether the market will impact your student loans depends on the type of student loan you have.

Do Federal Loan Interest Rates Change with the Market?

Federal student loans offer fixed interest rates. If you currently have a federal student loan issued after 2006, your interest rate will not change based on the market. However, the market does have an impact on how federal student loan interest rates are set. Since 2013, Congress has set student loan interest rates based on the annual auction of 10-year Treasury notes. When the Federal Reserve increases short-term interest rates, student loan interest rates will be raised accordingly, however the same is true if rates are lowered.

Do Private Loan Interest Rates Change with the Market?

For borrowers with private student loans, changes in the market will only impact their student loans if they have variable rate loans. If their loans have fixed interest rates, interest rate increases will not affect them. However, borrowers with variable interest rate loans will see their minimum payments increase as their interest rates rise. For new student loans, changes to the market will likely result in slightly higher interest rates. Rising interest rates in all sectors of the economy will translate to higher student loan rates; however the ultimate factor in the interest rate you receive will be your creditworthiness.