Current federal student loan rates for the 2023-24 school year are a bit higher than rates for the prior school year, 2022-23 (e.g., 8.05% vs. 7.54% for Direct PLUS loans for graduate or professional students or parents of undergraduate students), and quite a bit higher than for the 2020-21 school year (e.g., 8.05% vs. 5.30% for Direct PLUS loans for graduate or professional students or parents of undergraduate students).
The reason current federal student loan interest rates are higher this year is because rates are determined by the high yield of the 10-year Treasury note last auctioned in May, and it was higher this past May than it was the prior May – and in May 2020, when businesses were in lockdown due to Covid-19. (Generally, the yield goes up when investors are optimistic about the future.)
Read on for more about how federal student loan interest rates are determined, how they have varied over the years, and when they can be higher than private lender rates.
Overview of Federal Student Loan Interest Rates for 2023-24
Federal student loan interest rates for the current 2023-24 school year are higher than last year. In fact, the rate for Direct Subsidized loans for undergraduates (5.50%) is the highest it’s been since the 2009-2010 school year, when the rate was 5.60%.
Here’s an overview of how rates have increased over the last four years:
Why Federal Student Loan Interest Rates Can Vary From Year to Year
The reason that federal student loan interest rates fluctuates has to do with how and when federal student loan rates are set. By federal statute, they are determined once a year and are based on the high yield of the 10-year Treasury note last auctioned in May (for the upcoming school year).
That yield (3.448% in May 2023) is then added to a required percentage (4.60% for Direct PLUS loans for graduate or professional students or parents of undergraduate students) to get the federal interest loan rate for loans disbursed on or after July of that year (8.05%).
So in May 2020, when businesses were in lockdown due to Covid-19, the high yield of the 10-year Treasury note was less than 1%. In May 2022, as the Federal Reserve began to try to curb inflation by raising its rate, the high yield or index rate on the 10-year Treasury note was 2.94%, and in May 2023, as the economy was looking up in terms of inflation, the index rate was 3.448%.
Required Markups to the 10-Year Treasury Index Rate to Determine Federal Student Loan Interest Rates
The required percentage added to the high yield of the 10-year Treasury note last auctioned in May depends on the type of loan and borrower. The added percentages follow this schedule:
- For Direct Subsidized and Unsubsidized loans for undergraduate students, the added percentage is 2.05%.
- For Direct Unsubsidized loans for graduate and professional students, the added percentage is 3.60%.
- For Direct PLUS loans for parents of undergraduate students and for graduate or professional students, the added percentage is 4.60%.
How Federal Student Loan Interest Rates Have Been Set Over the Years
The federal student loan program began in the 1960s. Over time, the way rates are set has changed due to legislative action. Here’s a general timeline of how federal student loan interest loans have been set:
From the 1960s to 1992
Originally, Congress set the interest rates for student loans. The rates were fixed and ranged from 6% in the beginning to 10% for the years 1988 to 1992.
From 1993 to 2003
Congress amended the law so that rates were variable rather than fixed and reset annually. The formula for federal student loan interest rates was the interest rate on short-term Treasury securities at a set time plus 3.1%. The rate was capped at 9.0%. Over the next six years, Congress lowered the added percentage and the cap.
Soon after switching to variable rates, Congress passed the Student Loan Reform Act, which authorized the Direct Loan program. The law changed the formula for calculating interest rates so that they were pegged to 10-year Treasurys, which aligned with the term or length of student loans. The markup was lowered to 1.0%, and the new formula was to be used starting in five years.
But in 1998, because the Direct Loan program was taking longer than expected to replace the old loan program, where banks provided the loans instead of the government, Congress postponed when the new formula would be used until 2003. In the meantime, the old formula was used but with a 2.3% add-on (instead of 3.1%).
(Learn more at Student Loan Payment Calculator)
From 2003 to Present
Several bills have been passed trying to make student loans more affordable, including a bill that fixed the rate at 6.8% starting in 2006. For Direct Unsubsidized loans for undergraduate students and Direct Unsubsidized loans for graduate and professional students, the federal student loan interest rate stayed at 6.8% through 2013.
In 2013, a law enacted the current formula used to calculate federal student loan interest rates.
How Private Student Loan Interest Rates Differ From Federal Loan Rates
Of course, private student loan rates will fluctuate with market trends and from lender to lender. That said, private student loan rates for 10-year loans are generally higher than the federal interest rate when you are comparing rates concurrently on offer.
However, this isn’t always the case when it comes to student loans for parents or graduate/professional students. For the 2023-24 school year, the interest rate on Direct PLUS loans is 8.05%. But in late July 2023, some private student loan rates are actually lower.
Also, private student loan rates (and refinance rates) can be lower for a loan that has a shorter term length than the standard 10 years of federal loans.
What’s more, private student loan rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan.
What Private Lenders Consider When Determining Your Interest Rate
As mentioned earlier, private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:
- Credit History – When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.
- Your School – Most four-year schools are eligible for private loans, but some two-year colleges aren’t. Additionally, applicants typically have to be enrolled at least half-time to qualify for private student loans.
- Your Cosigner’s Finances – Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.
(Learn more at Student Loan Payment Calculator)
The Takeaway
Federal student loan interest rates have fluctuated over the years. Currently, they are higher for 2023-24 than they were for 2022-23.
Typically, federal interest rates are lower than private student loans rates offered in the same year. But they can also be higher, particularly for parents borrowing to pay their children’s tuition and for graduate or professional students.
Also, private student loan rates (and refinance rates) on offer at the present time can be lower than federal interest rates from previous years or they can be lower on loans for term lengths shorter than the standard 10 years.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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When should I get a personal loan vs. use a credit card?
You’ve decided that you need to borrow some money, but you don’t know exactly which type of loan will be best for your needs. Two of the most popular types of loans are personal loans and credit cards — but you don’t have to be a personal finance expert to know that they are both very different ways to borrow money.
Below we highlight the pros and cons of a personal loan vs. credit card to help you find out which one is best for your needs.
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A personal loan is a type of installment loan where the lender provides the borrower with a lump sum of money that they can use for a variety of purposes, such as making home improvements, covering car repairs, or consolidating debt.
Whether using a personal loan to pay down medical debt or pay for a vacation, personal loans can provide you with funding to meet your goals.
Generally, personal loans are paid back each month in fixed payments, or installments, with interest. Repayment is typically spread over a period of 12 months to seven years. You can use a personal loan for emergencies and financing major purchases.
Personal loans can be either secured or unsecured. An unsecured personal loan is an installment loan that’s not secured by any property such as a home or vehicle, whereas a secured personal loan is backed by some type of collateral. (Learn more at Personal Loan Calculator)
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A personal loan works like an installment loan that gives the borrower a lump sum of money — not revolving credit — that can be used for a variety of purposes. The borrower typically repays the loan over a set term, and these required payments may go toward principal, interest, and fees.
Typical Personal Loan Requirements
The requirements for personal loan funding typically require the borrower to provide proof of identity and proof of income. Lenders may review your creditworthiness when determining whether to approve or deny your personal loan application.
Typical Personal Loan Terms
Each lender can determine the terms and conditions of a personal loan, including the annual percentage rate (APR) comprising the interest rate and upfront fees. Borrowers with excellent credit may receive a lender’s best APR, whereas borrowers with bad credit may receive less favorable terms if approved for a loan.
Personal loan amounts may range from $1,000 to $100K. Personal loan repayment terms typically range from 12 months to seven years. You may compare personal loan rates and select an offer from the lender of your choice.
When to Choose a Personal Loan
A personal loan can be ideal for making large purchases. This simple type of loan allows you to break down a big purchase into smaller monthly payments that you spread out over time. A personal loan can also have lower interest rates than some other types of loans, including credit cards.
Generally, interest rates are lower for secured vs. unsecured personal loans, though with the former you run the risk of losing your collateral.
One of the top uses for a personal loan can be to consolidate your debts, especially those with high interest rates. And it’s also a great type of loan for people who would prefer to be committed to making the same payments each month. There are even personal loans available after bankruptcy.
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A credit card is a financial instrument that represents a revolving loan. When you use a credit card to pay for something, the credit card issuer (e.g., your bank) covers the cost of the purchase with the understanding that the cardholder will pay back the amount borrowed, plus any interest that applies.
When credit card users pay their entire statement balance in full by the statement due date, nearly all credit card issuers will waive interest charges. Credit cards typically represent an unsecured loan, so there’s no property that can be repossessed if credit card payments aren’t made. And while using a credit card irresponsibly can certainly damage your credit card, they can also help build it — in fact, there are a number of top credit building cards out there.
Credit card users also enjoy robust security protections against fraud and billing mistakes. They can also offer rewards in the form of cash back, points, or miles. And finally, credit cards can provide travel insurance policies, purchase protection benefits, and other perks.
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A credit card works like revolving or open-end credit — cardholders have a line of credit and the ability to make transactions up to the credit limit.
One of the keys to understanding credit cards is recognizing how your line of credit limits the spending power on your card. A portion of your available credit is used when you make transactions on the card. Unless you have a $0 balance, cardholders are expected to make at least minimum monthly payments each billing cycle.
Paying your credit card bills may replenish your available credit.
Typical Credit Card Requirements
Consumers typically need proof of identity and proof of income to become a credit card account holder. Credit card issuers may review your creditworthiness when determining whether to approve or deny your credit card application.
Some credit cards may offer 0% intro APR on purchases for several billing cycles or cash back rewards. You may compare credit cards and apply for the card of your choice.
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Depending on your circumstances, a personal loan may not be the right choice. A credit card can be a good option when you need a secure and convenient method of payment and are confident you can pay off your balance in the short term to avoid paying interest.
As a revolving loan, a credit card has no set terms, other than the minimum payment amount you must make each month. With a credit card, you can borrow as much or as little as you need up to your approved credit limit, and you only pay interest on the loan based on your account’s average daily balance. Some credit cards can also come with 0% APR introductory financing offers for new accounts.
That means you won’t begin incurring interest on your charges until the day they are made, and you can make payments against your balance at any time, and in any amount. All you have to do is make sure that you make at least the minimum payment each month on or before the statement due date.
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When comparing a personal loan vs. credit card, it’s important to consider the benefits and drawbacks of each.
When is a personal loan better than a credit card? This chart highlights how either a personal loan or credit card can help you meet your goals and the pros and cons of an installment loan vs. credit card.
Sofi
This table highlights some of the pros and cons of credit cards. (Learn more atHow Many Credit Cards Should I have?)
Sofi
Once you understand the advantages and drawbacks of each, it’s up to you to decide whether a personal loan or credit card will best meet your needs.
A personal loan can be a better choice when you are making a large purchase and want fixed repayment terms. A credit card, on the other hand, can be a better option when you occasionally need to finance smaller purchases, or are just looking for a method of payment that can sometimes be used as a loan.
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Even if you understand the difference between a loan vs. credit card, there are other funding options that may be worth considering. Below we highlight some alternative funding options you may consider:
- HELOC: A home equity line of credit, or HELOC, uses the equity in your home to secure a revolving personal loan, allowing you to draw funds as you need them. Just keep in mind you are putting your home up as collateral, which means you could risk losing it if you fail to repay the loan.
- 401(k) loan: You can also take loans from your 401(k) retirement plan, which is essentially making a loan to yourself from your own savings. However, there can be substantial penalties if you fail to pay it back on time or leave your employer with an unpaid loan. You’ll also be missing out on potential growth on those funds.
- Loans from friends and family: Friends and family can offer you personal loans. And while they may offer excellent terms without having to make a formal application, family loans can risk your relationships if not paid back.
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As you can see, there are clear differences between credit cards and personal loans, as well as pros and cons to consider when weighing whether a personal loan vs. credit card is better for your financial situation. Make sure you understand the ins and outs of whichever financial product you choose and that you can afford to pay off any debt you incur to avoid negative consequences to your credit score.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
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SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at here. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at here.
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