A college education may be the ticket to a higher-paying job after graduation, but for many people it also leads to a mountain of debt that can take years—or even decades—to pay off. Americans currently owe a record-high $1.41 trillion in student loans, according to the credit reporting agency Experian.

Key Takeaways

  • The interest rate on federal loans only changes once a year, based on the May auction of 10-year Treasury notes
  • Rates change more frequently for private loans, which can have either fixed or variable interest rates
  • While private loans are less expensive than federal loans for well-qualified borrowers, they typically don’t offer as many repayment plans or as much latitude when it comes to deferment. 

Once you leave school, it’s not just the loan balance itself that you have to worry about—you’ll also pay interest on the debt as long as you have the loan. The more you borrow, the more your financial health is affected by changes in interest rates.

So how much can today’s students expect to pay in finance charges? Here’s a look at the current interest rates for student loan borrowers:

Federal Student Loans (July 1, 2019 - July 1, 2020)  
Undergraduate 4.53%
Graduate 6.08%
PLUS 7.08%
Private Student Loans  
Fixed 3.82% - 12.49%
Variable 3.02% - 11.87%
Student Loan Refinancing  
Fixed 3.29%+
Variable 2.14%+

Source: U.S. Department of Education, Credible.com

Federal Student Loans

If you can’t afford the cost of a college education out of pocket, a federal student loan is usually a good place to start. Loans made through the government’s loan program have a number of key advantages over private loans:

  • Fixed interest rates on all loans
  • Multiple repayment options, including income-based plans
  • A loan forgiveness feature for borrowers who work in nonprofit or government jobs
  • Loan deferment for those who go back to school or undergo financial hardship

Another benefit of federal loans is that they’re available to all undergraduate students, so you don’t need to worry about having a strong credit history before you apply.

Federal student loans come in two basic varieties: subsidized and unsubsidized. The former does not charge interest while you’re enrolled in a college or university. That’s not the case with unsubsidized loans, which start racking up interest from the start; if you don’t pay the interest while you’re attending school, the charges simply get tacked onto your loan balance when you get out.

The interest rates for each academic year are determined by federal law and are pegged to the rate on 10-year Treasury notes. Undergraduate loans disbursed between July 1, 2019 and July 1, 2020 are subject to a fixed 4.53% interest rate, whether they’re subsidized or unsubsidized. Unsubsidized direct loans for graduates currently come with a 6.08% rate.

PLUS loans, which are available to graduate students and parents through the federal program, currently charge 7.08% interest. This academic year marks the first time in three years that all federal borrowers have seen these rates go down.

Private Student Loans

Federal loans aren’t always enough to cover your total education expenses, however. The most you can take out in subsidized federal loans—which are based on financial need—is $5,500 per year (the actual limit depends on your grade level and whether you’re a dependent for tax purposes). For unsubsidized debt, the maximum loan amount is $20,500.

That’s one of the reasons students and parents go to private lenders, who can help make up the difference. As with other bank loans, private student loan lenders will typically run your credit before offering you a loan. Because many undergraduates don’t have much, if any, borrowing history, they may need a co-signer to help get their application approved.

In general, the stronger your credit score, the lower the rate you’ll be able to snag. Another factor is whether you choose a fixed- or variable-rate loan. Fixed interest rates offer greater predictability, since you’ll know exactly what the finance charges will be over the life of the loan.

Variable-rate loans are typically less expensive initially, but there’s no guarantee of what you’ll be paying years, or even a couple of months, down the line. Depending on market conditions, you could end up with a lower rate—something borrowers have enjoyed in recent years—or one that’s substantially higher.

Because of today’s low-interest rate environment, students are borrowing inexpensively by historical standards. Some lenders are offering variable-rate loans as low as 3.02% to their most creditworthy customers, according to the comparison site Credible.com.

Even some fixed loans are being offered at less than 4% interest, although there’s a fairly large range based on your credit history and whether you have a reliable co-signer. Less-qualified borrowers could find themselves having to pay rates in the low double digits.

Refinancing Student Loans

Just as homeowners frequently refinance when interest rates drop, student loan borrowers can refinance their existing debt, regardless of what type it is, into a new private loan. So whenever you see a significant downward movement in rates, it may be worth using a loan calculator to figure out what your savings could be.

Refinanced loans, which are also available in fixed- and variable-rate varieties, have slightly lower finance charges than undergraduate loans. As of now, the low end of the range for fixed loans is 3.29%, with less-qualified borrowers paying somewhat higher rates. Variable-rate loans can be had for as little as 2.14% by borrowers with the most attractive credit scores.

Refinancing your federal loan may result in a lower interest rate, but you’ll lose some of the borrower protections that are only available with your government loan.

If you’re paying a lot more than that for your federal loan, it can be tempting to refinance and get a substantially cheaper private loan. But before you do, make sure you understand the risks. While your interest payments won’t be as high, you could lose some of the benefits that federal loans provide, such as the ability to defer payments when you lose a job or choose from a range of different repayment options.

If you work for a nonprofit organization, you also lose your ability to enroll in the Public Service Loan Forgiveness program, which wipes out your debt once you’ve made 120 qualifying payments.

The Bottom Line

Whenever you take out a loan with a substantial balance, the rate of interest that you’re paying takes on greater importance. It helps to know what the difference is between federal and private loans when it comes time to finance your education.

However, interest rates aren’t the only factor you should consider, as federal loans offer certain protections that most private lenders don’t provide. If you have both types of loans, be careful to keep the federal loans separate from private loans; don't combine them into a single loan.