Student loans, like any loans, have an interest rate (and, sometimes, other loan fees). While interest rate accrual on existing federal student loans was paused from March 2020 through August 2023 due to the Covid-19 forbearance, the 2023 debt ceiling bill officially ended the payment pause, requiring interest accrual to resume on Sept. 1 and payments to resume in October 2023. And of course, any new student loans — federal or private — will have an interest rate that impacts the total cost of the loan.
So what is the average student loan rate? While it would be difficult to nail down the average rate of all active student loans held by borrowers, we know the interest rates of new federal student loans, as well as the range of rates for private student loans.
What Is The Average Student Loan Interest Rate?
The interest rate on a student loan varies based on the type of student loan. Federal student loans issued after July 1, 2006, have a fixed interest rate. The rates on newly disbursed federal student loans are determined annually by fixed formulas specified in the Higher Education Act of 1965 (HEA).
These are the federal student loan interest rates for the 2023–24 school year:
- 5.50% for Direct Subsidized or Unsubsidized loans for undergraduates
- 7.05% for Direct Unsubsidized loans for graduate and professional students
- 8.05% for Direct PLUS loans for graduate students, professional students, and parents
All three of those rates have risen from the 2022-2023 school year, and the undergraduate rate has doubled since the 2020-2021 school year.
This means that the average rate for the three main types of federal student loans is 6.87%:
(Learn more at Personal Loan Calculator)
Private student loan interest rates vary by lender and each has its own criteria for which rates you qualify for. Private student loans can have either fixed interest rates that remain the same over the life of the loan or variable rates that can start lower than a fixed interest rate but then go up over time, based on market changes.
Private lenders may also offer different interest rates if you have a cosigner on your student loan. The interest rates on private student loans can vary anywhere from 4% to 17%, depending on the lender, the type of loan, and on individual financial factors including the borrower’s credit history.
How Are Interest Rates Determined?
As mentioned previously, the interest rates on federal student loans are set annually by fixed formulas specified in the HEA. The rates are tied to the financial markets — federal law sets them based on the 10-year Treasury note and a statutory add-on percentage with a maximum rate cap.
Since July 2006, all federal student loans have fixed interest rates. Although federal student loans are serviced by private companies or nonprofits selected by the federal government, these loan servicers have no say in the federal interest rate offered.
For private student loans, the lenders set their own rates, though they often take cues from federal rates. Each lender has their own algorithm and credit standards. The rates quoted for student loans vary based on each applicant’s individual situation — though generally the better a potential borrower’s financial history is, the better rate they may be able to qualify for.
To learn more about private and federal student loans check out our student loan help center. If you’re looking to reduce your interest rate, student loan refinancing may be right for you.
(Learn more: Private Student Loan Forgiveness: What Is It & How Does It Work?)
How Is Student Loan Interest Calculated?
After a three-year payment pause, the debt ceiling bill officially ended the Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1 and payments to resume in October 2023.
Interest on federal student loans typically accrues daily. To calculate the interest as it accrues, the following formula can be used: Interest amount = (outstanding principal student loan balance × interest rate factor) × days since last payment
In other words, you will multiply your outstanding loan balance by the interest rate factor. Then, multiply that result by the days since you last made a payment.
To calculate that interest rate factor you can divide the interest rate by the number of days of the year (365). For example, let’s say you have an outstanding student loan balance of $10,000, an interest rate of 4.75%, and it’s been 30 days since your last payment. Here’s how to calculate your interest:
$10,000 x (4.75%/365) = $1.30 daily interest charge
$1.30 x 30 days = $39
Interest amount $39
Many private student loans will also accrue interest on a daily basis, however, the terms will ultimately be determined by the lender. Review the lending agreement to confirm.
What to Look for in a Student Loan Interest Rate
When you take out a federal student loan, you’ll receive a fixed interest rate. This means that you’ll pay a set amount for the term of the student loan. In addition, all of the terms, conditions, and benefits are determined by the government. Federal student loans also provide some additional perks that you may not find with private lenders like income-driven repayment (IDR) plans.
The Saving on a Valuable Education (SAVE) Plan is one of the IDR options to consider if you’re a federal student loan borrower. The SAVE Plan is the most affordable repayment plan for federal student loans, according to the U.S. Department of Education. Borrowers who are single and make less than $32,800 a year won’t have to make any payments under the SAVE Plan. (If you are a family of four and make less than $67,500 annually, you also won’t have to make payments.)
Private student loans can have higher interest rates and potentially fewer perks than federal student loans. You may want to take advantage of all federal student loans you qualify for before comparing private loan options.
Average Interest Rates for Student Loans FAQ
Here are some common questions about the average interest rates of student loans:
What Is a Good Fixed Interest Rate for Student Loans?
When it comes to cost, the lower the interest rate, the better. The lower the interest rate, the less a borrower will owe over the life of the loan, which could help individuals as they work on other financial goals. If you’re taking out federal loans, the student loan interest rate is set by federal law, so you don’t have a choice for what is and isn’t a reasonable interest rate.
When it comes to private student loans, it’s wise to shop around and compare your options to find the most suitable financing solution. Since every lender offers different terms, rates, and fees, getting quotes from multiple lenders may help you select the best option for your personal needs. Keep in mind that the rate you receive on a private student loan is largely dependent on your credit score and other factors, whereas federal student loan interest rates are based on HEA formulas and not your creditworthiness.
Also keep in mind that private student loans do not have the same borrower protections as federal student loans, including IDR plans or deferment options, and should be considered only after all federal aid options have been exhausted.
Is $30K In Student Loans Bad?
If you owe $30,000 in student debt, you’re right in line with the national average. More than 40 million consumers have outstanding student debt as of 2023, and the average borrower owes about $35K, according to TransUnion®.
Is a 4.75% Interest Rate Good?
With interest rates on private student loans ranging anywhere between 4% and 17%, and the three types of federal student loan rates averaging 6.87% for the 2023-2024 school year, a 4.75% interest rate in 2023 is lower than what most students can get on a new student loan.
How Can I Reduce the Interest Rates on my Student Loans?
The interest rate on federal student loans, while fixed annually for the life of the loan, does fluctuate over time. For example, the rates for Direct Subsidized and Unsubsidized loans for undergraduates doubled from 2.75% in 2020–21 to 5.50% in 2023–24.
To adjust the rate on an existing student loan, borrowers generally have two options. They can refinance or consolidate the loans with hopes of qualifying for a lower interest rate.
Refinancing a federal loan with a private lender eliminates them from federal borrower protections such as income-driven repayment plans or Public Service Loan Forgiveness. The federal government does offer a Direct Consolidation Loan, which allows borrowers to consolidate their federal loans into a single loan. This will maintain the federal borrower protections but won’t necessarily lower the interest rate. When federal loans are consolidated into a Direct Consolidation Loan, the new interest rate is a weighted average of your original federal student loans’ rates.
Refinancing student loans with a private lender may allow qualifying borrowers to secure a lower interest rate or preferable loan terms. Note that extending the repayment term will generally result in an increased cost over the life of the loan.
To see how refinancing could work for your student loans, take a look at the student loan refinance calculator.
The Takeaway
The average student loan interest rate varies depending on the loan type. The interest rate for federal Direct Unsubsidized and Subsidized loans is set annually by federal law and fixed for the life of the loan. The interest rate on private student loans is determined by a variety of factors including the borrower’s credit history and may range anywhere from 4% to up to 17%.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.)
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
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Can I use a 529 to pay off student loan debt?
A 529 plan is an investment account that’s mainly used to pay for college and other educational expenses. You can also use 529 plan funds to pay off student loans, thanks to a law that was signed in 2019. More specifically, you’re allowed to use up to $10,000 per beneficiary on student loan repayment.
Read on to learn more about 529 plans and what you can (and can’t) spend 529 savings on.
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A 529 plan is a tax-advantaged investment account that was created in the 1990s to help people save for college. Parents often open 529 savings plans on behalf of their children to save for their postsecondary education expenses.
There are two types of 529 plans: savings plans and prepaid tuition plans. Savings plans allow you to make tax-free investments and withdrawals, as long as you’re using the money to pay for qualified educational expenses.
529 savings plans work like a Roth IRA, since you submit after-tax dollars and invest them in mutual funds or similar investments. Your savings may increase or decrease depending on the performance of your investments.
Prepaid tuition plans, on the other hand, let you prepay tuition at participating public colleges at today’s rates. You won’t have to pay more in the future, even if tuition increases by the time your child attends.
Every state offers its own 529 plan, but you’re not limited to the plan offered by your state of residence. You can choose another state’s plan if you prefer it. That said, opting for your own state’s plan could make you eligible for certain tax deductions or credits.
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Although 529 plans are primarily used for college expenses, they can now also be used to pay off a certain amount of student loan debt. Thanks to the 2019 SECURE Act, 529 plan owners are now allowed to use their funds to pay off up to $10,000 in student loans for the account’s beneficiary.
That $10,000 limit applies to each beneficiary, not each account. If you have remaining funds in the account, for instance, you could change the beneficiary to the student’s sibling to help them pay off student loans. Parents with PLUS loans could also make themselves the beneficiary and put $10,000 toward their own loans.
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Besides paying student loans, you must use 529 plan funds on qualified educational expenses. If you withdraw the money for non-qualified expenses, you could be subject to income taxes and a penalty.
Here are some common expenses to use 529 funds on:
- Tuition and fees
- Books and supplies
- Housing
- Meal plans
- Computers
As part of the Tax Cuts and Jobs Act of 2017, 529 plan owners can also use 529 funds to pay for private school tuition for kindergarten through 12th grade. The maximum you can use on K-12 tuition is $10,000 per year.
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You might have some additional school expenses that don’t count as qualified education expenses. Here are some things you can’t use 529 plan funds for:
- College application fees
- Testing fees, such as the SAT or ACT
- Transportation
- Health insurance, unless the fee is an official requirement for enrollment and attendance
- Extracurricular activities, such as sports and clubs
- Dues for fraternities and sororities
- Room and board costs that exceed the school’s official cost of attendance
If you use 529 plan funds on non-qualified expenses, you’ll have to pay income taxes and a 10% penalty.
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Now that you know the answer to the question “can a 529 be used to pay student loans?” is yes, let’s talk about what that means.
If you’d like to use a 529 to pay student loans, there are both benefits and drawbacks to consider. Here are some pros and cons to keep in mind before you move forward with this strategy.
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- Tax benefits: Your 529 savings can grow tax-free, as long as you spend the funds on qualified expenses. Some states also offer tax deductions or credits on your 529 contributions, leading to additional savings.
- Option to change beneficiaries: You can change the beneficiary on your 529 plan account, allowing you to withdraw up to $10,000 for the primary student, their siblings, or even yourself to use toward student loans.
- Flexibility: You can contribute to or take distributions from a 529 plan at any age, meaning you could contribute to an account even after a student has graduated from college and use the funds toward student loans.
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- Limit of $10,000 per beneficiary: The maximum amount of 529 funds you can use toward student loan repayment per beneficiary is $10,000, which may be only a small portion of a borrower’s total student loan debt.
- May make you ineligible for the student loan interest tax deduction: Since the 529 plan already comes with tax benefits, the IRS doesn’t let you simultaneously claim the $2,500 student loan interest tax deduction when you use a 529 plan to make student loan payments.
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Even if you use a 529 plan to pay off $10,000 of your student loans, you might have additional debt left over. Here are some strategies to help you pay it off:
- Explore your repayment plan options. Federal student loans are eligible for a variety of repayment plans, including graduated repayment and income-driven repayment. If you need to reduce your monthly bills, consider applying for one of these plans.
- Set up biweekly payments. Instead of paying your loan payments once a month, pay half the monthly payment every two weeks. This strategy adds up to an additional one month’s payment per year. This extra payment could cut down on interest charges and reduce how long it takes to pay off student loans.
- Pursue student loan forgiveness. There are various forgiveness and loan repayment assistance programs that will forgive part or all of your debt in exchange for qualifying service. Some companies also offer student loan assistance benefits to employees. Learn more about employer student loan repayment opportunities, plus other options so that your student loans are forgiven.
- Look into refinancing your student loans. If you owe high-interest loans, it could be worth refinancing your student loans for better rates and new repayment terms. Just be careful about refinancing federal loans with a private lender, as doing so means forfeiting access to federal protections.
Finally, if you can afford to pay your loans off ahead of schedule, consider making extra payments toward your principal amount. Use a student loan calculator to see how much you’d need to pay to shave a year or two off your repayment timeline and how much interest you could save. By getting rid of your debt early, you could shift your focus to other financial priorities.
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- Refinancing your student loan can lower your monthly payments and help you adjust your loan term. Compare student loan refinancing rates to find a loan that works for you.
- Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
- One pain-free way to pay down your student loan sooner: send in your tax refund to put against the principal balance. Since it’s money that has already been taken out of your pay, you won’t miss it.
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Nearly 43 million Americans owe $1.745 trillion in student loans, with the average student loan debt adding up to $37,787 in federal loans per borrower, according to the Education Data Initiative.
Using a 529 plan to make student loan payments can be a savvy financial move, since your contributions and withdrawals will be tax-free as long as you don’t spend more than $10,000 per beneficiary.
At the same time, using savings from a 529 plan on student loans means you can’t simultaneously claim the student loan interest tax deduction. Given the tax implications, it could be worth speaking with a financial advisor to determine the best move for your specific situation.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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