Understanding Interest Rates

Federal student loan interest rates, which are set by Congress, vary based on the type of loan and the initial disbursement date of the loan. For example, federal loans for parents and graduate/professional students have higher interest rates than federal student loans for undergraduate students. Federal student loans disbursed in the 2014-15 academic year have a higher interest rate than similar loans disbursed in 2013-14. Although federal student loans issued prior to July 1, 2006 have variable interest rates, current interest rates are fixed throughout term of the loan.

Students who borrow with federal student loans are also charged a loan origination fee, which is a percentage of the total loan amount. The loan fee, like interest, varies based on the type of loan and when it is disbursed. The loan fee is set by the federal government and applies to all federal student loans.

How to Lower Student Interest Rates

In addition to having the convenience of one loan and one monthly loan payment, instead of multiple loans/multiple monthly payments, borrowers may also be able to lower interest rates on their educational loans through loan consolidation or refinance. Options available include Direct Loan consolidation through the federal government program or loan consolidation through a private lender to refinance student loans at a lower rate.

Direct Loan consolidation offers:

  • Consolidation of subsidized and unsubsidized federal student education loans with a fixed interest rate that is the weighted average of all interest rates of the loans included in the consolidation loan
  • Lower student loan interest rates for automatic withdrawal of loan payments
  • Up-front interest rebates for certain loans disbursed before July 1, 2012
  • A variety of repayment plans based on personal borrower circumstances
  • Deferment and forbearance (postponing payment) options for eligible borrowers
  • Loans discharged or forgiven if borrower meets criteria
  • Private loan consolidation or refinance options depend on the specific lender and can include:
  • Receiving a fixed interest rate or a variable interest rate depending on personal circumstances
  • Extending the loan repayment period to reduce monthly payments (keep in mind that more interest is paid when the loan period is extended)
  • Lower student loan interest rates for automatic withdrawal of loan payments or "good customer" status, which can include an outstanding car, home or education loan or existing account with the same lender
  • Reduced interest rates due to a higher borrower credit rating or having a cosigner with a high credit rating
  • Variable repayment terms; the shorter the loan term, the less interest is paid
  • Lower interest rates based on degree earned and academic performance (selected lenders)

Note that it's always wise to shop around for the best student loan refinance or consolidation rates and make sure there are no application, origination or prepayment fees.

Knowing what to look for and how to find lower student loan rates can help consumers save money whether they choose to consolidate through the federal program or through private loan consolidation or refinance programs.

Frequently Asked Questions